Institutional Reform in the Rural Sector with Labor and Capital Flows: Factor Income Effects, Structural Changes and Misallocations

32 Pages Posted: 29 May 2016

Date Written: May 27, 2016

Abstract

We analyze the general equilibrium effects of a fundamental property regime transition in the rural sector - agricultural or resource - when both labor and (reproducible) capital are free to move. In contrast to manufacturing, rural production has two characteristic features: it uses a fixed natural asset (land or other natural resources) and operates under one of two property regime types: common property versus exclusive property. Common property is fundamentally characterized with sharing, thus corresponding to such institutions as the family farm (Lewis 1954), free access to resources, and collective use, but adapted for the presence of capital use. We show that labor may actually gain from being effectively forced out of the rural sector. More generally, relative factor intensities determine the factor return effects of the transition, as well as either capital or labor deepening in both sectors. And while the unit cost of effective input efforts decrease, both factors flow out of the rural sector. Under a common property regime, the agricultural productivity gaps for labor and capital are uniquely determined by the output elasticity of land.

Keywords: Institutions, Property Rights, Agriculture, Natural Resources, Factor Migration, Factor Returns, Redistribution, Factor Misallocation, Structural Changes, Agrarian Reform, Resource Privatisation

JEL Classification: D02, D23, D33, L16, N50, O13, O15, O17, Q15

Suggested Citation

Congar, Ronan and Hotte, Louis, Institutional Reform in the Rural Sector with Labor and Capital Flows: Factor Income Effects, Structural Changes and Misallocations (May 27, 2016). Available at SSRN: https://ssrn.com/abstract=2785861 or http://dx.doi.org/10.2139/ssrn.2785861

Ronan Congar

EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

Louis Hotte (Contact Author)

University of Ottawa ( email )

Department of Economics
55 Laurier E.
Ottawa, Ontario K1N 6N5
Canada
+161 356 25800 1692 (Phone)
+161 356 25999 (Fax)

HOME PAGE: http://aix1.uottawa.ca/~lhott3/

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