Determinants of Participation and Transaction Costs in Rwanda’s Land Markets

Land markets play a limited role in
subsistence economies with low skill-intensity of
agricultural cultivation, equally distributed land
endowments and little movement out of agriculture to join
the non-farm economy. But, as the economy starts to
diversify, the scope for efficiency-enhancing land transfers
beyond immediate kin and for longer than just one season
assumes significantly greater importance. Lease markets can
contribute to the diversification of the economic base in
rural areas by allowing those with limited farming skills to
take up non-agricultural employment or to migrate
temporarily without losing their links to rural areas, and
those with comparative advantage in agriculture to increase
the size of the land they farm. Land sales, on the other
hand, may allow households who want to move into the
non-agricultural economy to mobilize the capital that will
help them to exploit profitable economic opportunities.
Programs aiming to provide higher level of tenure security
and better land information systems have often been
justified by noting their impact on lowering transaction
costs in land markets. Registered land rights make it easier
to identify rightful land owners, negotiate and enforce
contracts, and reduce the risk of land owners not being able
to recover land that they had rented out. This could in turn
increase the number of efficiency-enhancing land market
transactions; facilitate credit access via the use of land
as collateral; and foster structural change and
transformation. At the same time, in settings where market
imperfections are prevalent, reducing transaction costs in
one market will not necessarily improve outcomes across the board.