Factor market imperfections and the land rental market in the highlands of Eritrea: theory and evidence

This paper looks at the role of market imperfections in explaining leasing behaviour of households using sample data from the Highlands of Eritrea. It looks at the tenancy or land rental market, the position of households in that market (as landlords, tenants or non-participants) and assesses the transaction costs related to the adjustment process in the tenancy market.

The paper tests for fixed and variable transaction costs related to adjustment in the land rental market. A two-stage approach for participation in the market as landlords or tenants is used for this. Data from 32 villages in the highlands of Eritrea are used for the analysis. It offers:

• a literature survey
• a leasing model under imperfect markets for non-land factors and develop a set of testable hypotheses
• an outline of the econometric models and discussion of estimation methods
• a presention of the data and discussion of the results based on informal and formal analysis of the data

The analysis demonstrates the importance of the land rental market for adjustment to nontradable or semitradable non-land household endowments. There were indications of significantly higher fixed transaction costs faced by potential tenants than by potential landlords.