Ethnic Divisions, Contract Choice and Search Costs in the Guatemalan Land Rental Market
28 Pages Posted: 3 Feb 2005
Date Written: December 2004
This paper shows how ethnic diversity in a context of weak property rights enforcement can result in market segmentation. In particular, the paper analyzes how contract enforcement problems in a period of high ethnic tensions affect the joint decision of partner and contract choice by landlords in the land rental market in Guatemala. The results show that landowners without formal title are more likely to restrict their partners for a rental contract to tenants from the same ethnic group. However, partner choice is found to be less important for renting with interlinked land-labor contracts. The results also provide evidence of the importance of search costs, as the relative scarcity of tenant types is found to have an effect on partner choice. These findings suggest that informal contract enforcement within ethnic circles of confidence might lead to a suboptimal land allocation and contract choice. To the extent that this limits access to land for the indigenous poor, this could further exacerbate the ethnic tensions and lead to a vicious cycle.
JEL Classification: 01, Q15
Suggested Citation: Suggested Citation