Essays on resource allocation, land investment and climate change in smallholder agriculture

Abstract

In this thesis we investigate drivers of agricultural productivity in the context of rural smallholder farmers in low-income countries. In the first chapter we explore the link between climate change induced adverse weather events and investments into adaptation by rural farmers under the presence of frictions in rural credit markets. The second chapter is split into two parts. In the first part we use panel data of Ugandan farmers to analyze the role of land rental and sales markets for resource allocation and land investments. In the second part we build a dynamic heterogeneous-agents model to quantify the impact of rental and sales markets on aggregate output and the welfare distribution.

Weather Shocks and Financial Constraints to Agricultural Climate Adaptation Along increasing average temperatures, the rising frequency of extreme weather events is one of the major threats of climate change - in particular for agriculture. In this paper we develop a dynamic heterogeneous-agents model of a farming economy in which farmers have rational expectations about the arrival of weather shocks. Farmers can invest in adaptive capital which mitigates damage in the case of an adverse one-period event in the future. Investments in adaptive capital can be financed by credit whose availability depends on individual ownership of semi-exogenous land used as collateral. We use the model to quantify different shock scenarios in terms of their impact on investment, productivity and the welfare distribution. We find that the presence of a collateral constraint has substantial distortionary effects on investments and welfare in particular for low productive farmers who rely strongly on external borrowing. At the same time, our results suggest that the aggregate welfare impact depends on price effects that shift relative income changes between farm operators and land investors which has differential effects for low and high productive farmers. In the most extreme scenario that we consider, this leads to a 0.3 percentage point lower welfare reduction under incomplete credit markets relative to the frictionless economy.

Investment, Misallocation and Markets for Land - Evidence from Uganda Low levels of agricultural investment and misallocation of productive inputs are key determinants of Africa’s low agricultural productivity. In this paper we study the joint impact of land rental and sales markets on both land allocation and investment incentives using panel data for Uganda and exploit exogenous regional variation in market frictions. We find that a lower degree of market frictions increases the efficiency of the land distribution and that lower frictions allow farmers to partially substitute land rentals by land purchases. We further show that long-term investments in land are more frequent on owner-operated than rented land which highlights the implicit role of the sales market for investments.

Building on this, we develop a dynamic structural model to quantify the impact of land market frictions and the investment gap between owner-operated and rented land. We find that reduced misallocation through the rental market increases productivity by around six percent. Lower frictions in the land sales market, however, increase misallocation and thereby decrease productivity by around eight percent. At the same time, higher investment incentives cause larger capital accumulation increasing output and consumption. Under the complete markets scenario, the effect of misallocation via the rental market and higher investment incentives under a frictionless sales market amplify each other which almost doubles aggregate consumption.