Land Market Frictions and Manufacturing in India

Abstract

This paper examines how frictions in the market for land hinders the growth of manufacturing firms in developing economies. Using unique manufacturing census data from India, I document how firms acquire many small parcels of land over time. I call this the small land bite strategy. Land market frictions are the result of increased land fragmentation, poor land records and restrictive land use policies. I estimate a model of dynamic land acquisition where land adjustment costs vary spatially, by ownership and on the size of adjustment. I find private establishments pay substantially more for land aggregation than government-affiliated firms. I use the model to calculate the lost producer profits due to land frictions and analyze the effects of proposed government land pooling policies on firm growth and land misallocation.

Keywords: Land Misallocation, Fragmentation, Land Frictions, Adjustment Costs, Manufacturing, India, Production

JEL Classification: D25, R52, O14