Social Networks and Factor Misallocation in Agriculture

Presenting the joint research of Daniel Agness, Florence Kondylis, John Loeser, and Jeremy Magruder.Abstract: When active, agricultural factor markets in developing countries should reduce misallocation, but do not; factor trade must be between the "wrong'' farmers.

We use a novel transaction-level panel dataset to examine who trades with whom in Rwandan villages. Within villages, we find that physical distance and social connectedness are as important as TFP in predicting factor trade.

We develop a trade model to characterize the frictions resolved by physical and social distance, and find that social networks improve allocative efficiency in land markets by reducing the cost of sustaining productive trade.

Our estimates imply that frictions alleviated by networks limit the gains from land trade by 80%. Evidence from an RCT suggests these frictions are not easily resolved through policy.