Security of Property Rights and Transition in Land Use

Price and yield uncertainty are traditional considerations in agricultural markets and their impact on development. Agricultural producers in transition economies face an additional risk factor – changes in the institutional protection of property rights. This paper illustrates how institutional uncertainty may affect investment, land use, and crop mix patterns. In particular, in the Ukrainian example, the rights of tenants are viewed as uncertain in anticipation of establishment of an open market for sale of agricultural land. Establishment of the land market in Ukraine has been postponed several times over the last fifteen years and a significant number of lease contracts are not formalized. A large panel of farm-level data was used to show that a higher share of rented land is associated with a lower share of land used for investment intensive perennial crops controlling for prices and other factors. The difference in response to uncertainty is found to be significant among three crop types: perennials, grains and oil crops. The implication is that the lower level of protection of use rights and uncertainty regarding the future regulation of land sales market leads to under-investments in more capital intensive crops. As a result, tenants deviate from the optimal crop mix, reducing the productivity of tenant farms. Farms under 200 ha are affected the most negatively as they are less likely to be able to access the level of legal and political protection enjoyed by large farms. As a result, Ukraine faces significant losses in the value of agricultural production and GDP in the short and longer run.