Land Acquisition for Industrialization and Compensation of Displaced Farmers (IGC Working Paper)

Abstract

This paper addresses the question of how farmers displaced by acquisition of agricultural land for the purpose of industrialization ought to be compensated. Prior to acquisition, the farmers are leasing in land from a landlord, either a private owner or a local government. We identify three sets of incentive effects: the decision of the landlord to sell the land ex post to an industrial developer, and ex ante incentives of tenants and landlord to make specific investments in the agricultural quality of the land. Our main result is that under a broad class of circumstances, independent of equity considerations, efficiency considerations alone require farmers be over-compensated for their loss of agricultural income in the event of conversion