from other relatively malaria free regions;<sup>16</sup> (iv) unlike some countries such as China (Hukou), Vietnam (Ho Khau), and Ethiopia, there are no geographic mobility restrictions or other policies that tie households to a village in Sri Lanka. Sri Lanka is thus an excellent case study to understand the effects of sales and rental restrictions in the rural land market, as the effects of land market restrictions are not confounded by the effects of other related policies.<sup>17</sup> We discuss a number of potential objections to the identification strategy and provide evidence on its credibility in section 3 below.

The empirical results show that land restrictions reduce the probability of participation in non-agriculture significantly: a one percentage point increase in land restrictions reduces probability of participation in non-agriculture by 1.38 percent.<sup>18</sup> Land market restrictions thus hold back structural change from agriculture to non-agriculture in a rural economy. The more disaggregated analysis using a multinomial logit model indicates that land restrictions have negative and statistically significant effects on the probability of wage employment in manufacturing and services activities, with a particularly large effect on services employment.<sup>19</sup> In contrast, there is a positive effect on the probability of being employed in agricultural wage work. The probability of self-employment in the non-agricultural activity, however, does not change significantly with an increase in land under restrictions suggesting an absence of a collateral and credit effect. The instrumental variable regression for wages confirms that land restrictions affect local wage adversely, and lower per capita household consumption in a village. Earlier results in the context of Sri Lanka also show that land restrictions affect wages negatively, for both men and women (Emran and Shilpi (forthcoming, 2015)). The evidence thus rejects the collateral or insecure property rights channels, and highlights the importance of migration costs, as emphasized by Hayashi and Prescott (2008).

The rest of the paper is organized as follows. Section 2 provides the main conceptual framework for the empirical estimation. Section 3 discusses the empirical strategy adopted in the paper for identification

> 16This observation extremely important as it implies that health, education, attitude etc. of the current generation living in LDO lands (i.e., surveyed in 2002) cannot be affected by historical malaria in any significant way. For a complete discussion including direct evidence, please see section (3) below.

> 17For example, the Hukou system in China controlled rural urban migration with a web of restrictions that span employment, education, and marriage. Moving to urban areas without an urban Hukou would mean that a family would lose grain rations, the land, and the children will not be able to attend schools in urban areas. Although over the years, Hukou restrictions have been relaxed in some provinces, it is difficult to treat these changes as exogeneous, as they are partly determined by the economic changes in a province. A significant part of the existing literature focuses on China, Vietnam, and Ethiopia.

> 18The nonagriculture comprises of three categories of employment: self employment in non-farm, wage employment in manufacturing, and wage employment in services, and the agriculture includes both agricultural self-employment and wage employment.

> 19In multinomial logit model, we treat self-employment in agriculture as the omitted category. We use a control function approach to instrumental variables estimation for multinomial logit.

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