Nonconvex Transaction Costs and Land Rental Market Participation in Malawi

Abstract

We assess how nonconvex transaction costs constrain access to and participation in the land rental market by smallholder farmers in sub-Saharan Africa. The theory suggests a dynamic externality due to such transaction costs and that orchestrated participation can reduce such costs and enhance future participation. We use dynamic random effects probit and Tobit models with balanced panel data from Malawi to assess participation on the tenant side of the market. We observe that initial and earlier land rental market participation significantly increases participation in the subsequent years, consistent with dynamic nonconvex transaction costs and possible entry barriers in the market.