insurance markets have to be analyzed together. Efforts at land redistribution that do not simultaneously address credit market imperfections may be costly and ineffective.

_Portfolio composition:_ Small producers' inability to access formal markets for credit and insurance often forces them to adopt costly insurance substitutes, one of which is the adjustment of crop and asset portfolios to a low return -low risk combination.<sup>31</sup> In order to ensure satisfaction of a minimum subsistence requirement during periods of distress, credit-constrained producers could hold a portfolio of less risky but also less productive assets than unconstrained producers. In particular, small holders may demonstrate a lower demand for land than that which would seem to be justified by their potential productive advantage. Zimmerman and Carter (1996) use parameters from Burkina Faso to show that, starting from an egalitarian distribution of land, production risk together with covariance of land prices, leads to successive concentration of land via sales from more productive small producers to relatively less productive large farmers. This illustrates that improving the functioning of land sales markets will not necessarily lead to better resource allocation if other markets' distortions are not tackled.<sup>32</sup> _Transaction costs:_ A further factor that might prevent land markets from achieving a first-best allocation is the transaction cost associated with land sales and rentals. It has often been observed (see, for example, Balcazar 1993, Carter and Zegarra, 1995) that, especially in countries with a dualistic distribution of land ownership, land _sales_ markets are highly segmented in the sense that, despite a considerable frequency of land transactions within farm size groups, land sales across farm-size class-boundaries are virtually absent. One explanation is that transaction cost entailed in subdividing farms so as to enable to a multitude of small holders is high. Similarly, the fact that certain costs (e.g. formal registration) associated with land transactions are independent of the size of the purchase creates indivisibilities that would either discourage small land transactions or drive them into informality where such costs are not incurred.

While the discussion of costs associated with land _rentals_ in the literature is less extensive, government regulations appear to have reduced the amount of land leasing below what would take place otherwise. Even in countries that avoided the imposition of explicit restrictions on tenancy, which (as discussed below) were associated with significant efficiency losses, the threat of expropriative land reform in many countries implied that renting out land to more productive smaller producers exposed the landlord to a considerable risk of losing ownership rights in the course of land reform. To prevent this from happening, many landlords

> Examples are provided by Rosenzweig andWolpin (1995), Dercon (1996), Dercon and Krishnan (1996), and Rosenzweig and Binswanger (1993).

> **_32_** The fact that study of land markets can not be divorced from the functioning of other markets has beeremphasize by Basu (1986) in a model of "interim" land transactions which explicitly serve as a credit substitute. In this context, the supply _of_ land for sale would increases with the probability of being able to buy back the land, the attractiveness of other (financial) assets as compared to land, and the need for liquidity. Sengupta (1997) draws out the implications of limited liability on contract choice within a more general set of contractual options.

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