Factor Market Imperfections and Rural Land Rental Markets in Northern Ethiopian Highlands

This is a chapter in a book entitled "The Emergence of Land Markets in Africa Impacts on Poverty, Equity, and Efficiency" edited by Stein Holden, Keijiro Otsuka and Frank Place, 2009.

In a world where asymmetric information and imperfections in
capital and various agricultural input markets dominate, there are good reasons
for farm households to prefer transferring land through land rental markets
rather than through the formal land sales markets. In Ethiopia land rental
market are given exceptional role and land sales are banned, even though there
are acute market imperfections for non-land factors of production due to high
transaction costs. Studies that address the allocative efficiency of land
tenancy markets in Ethiopia have been conducted but are inconclusive because of
data limitations and methodological weakness.

Using survey data from randomly sampled 400 household from
16 villages in Tigray region, this chapter aims:

   -   to investigate factors that affect farm
households’ likelihood of participation

   -   to assess the efficiency of factor ration
adjustment through the land rental market

   -   to examine the extent of transaction costs,
rationing, and asymmetry in the land rental market

Results indicate that because of imperfections in non-land
factor markets, land rental markets proved important. Continued prohibition of
land sales market makes land rental transactions important for more long term
as well as short-term adjustments of factors of production across households.