Do Land Market Restrictions Hinder Structural Change in a Rural Economy? Evidence from Sri Lanka

Abstract

This paper investigates the effects of land market restrictions on structural change from agriculture to non-agriculture in a rural economy. A model with higher migration costs due to land restrictions identifies the possibility of a reverse structural change where the share of non-agricultural employment declines. For identification, this paper exploits a natural experiment in Sri Lanka, where historical malaria played a unique role in land policy. The evidence indicates significant adverse effects of land restrictions on manufacturing and services employment. Land restrictions increase wage employment in agriculture but reduce it in manufacturing and services, with no effects on self-employment in non-agriculture.