Insecurity of Property Rights and Social Matching in the Tenancy Market October 2007

This paper shows how property rights insecurity can result in the reproduction of local inequalities because of social matching in assets markets. A principal-agent framework is used to model the landlord’s decision to rent when he takes into account the risk of losing the land and contract enforcement is decreasing in social distance with his tenant. These effects are quantified for the case of local land rental markets in the Dominican Republic. Results show that insecure property rights lead to matching in the tenancy market along socio-economic lines, severely limiting access to land for the rural poor. Simulations suggest that improving tenure security would increase the total area rented to the poor by 63%. Property rights insecurity hence not only affects asset owners, but also those with whom they might interact in the market.