Land Use Restrictions, Misallocation in Agriculture, and Aggregate Productivity in Vietnam

We evaluate the effects of restricted land use rights on aggregate productivity using micro-level data within a quantitative model. In particular, we exploit the Rice Land Designation Policy in Vietnam, which forces farmers to produce rice on almost 45% of plots of land. The policy provides a natural setting for investigating the aggregate effects of land use misallocation. We quantify the impacts of this system by formulating a two-sector model featuring production and occupation choices. We also use digitized versions of Vietnam’s Local Land Use Atlas and Global Agro-Ecological Zones database to construct a micro-spatial dataset that shapes important features of the model and allows us to compare the restricted against a counterfactual efficient allocation. The main findings suggest that eliminating all land use restrictions leads to 10.6% gain in agricultural total factor productivity and 4.36% increase in real GDP per capita. While misallocation in agriculture has been studied extensively, our research highlights a novel source of misallocation that is prevalent in other countries such as China, Myanmar, Uzbekistan, among others.