**_Credit market access:_** A key reason for land markets' transfer from large to small producers to be rarely observed is that it is very difficult for small farmers to access markets for credit and insurance.<sup>29</sup> This implies that, on the one hand, the value of accessing credit markets is capitalized in land prices, making it very difficult to acquire land in the sales market with the expectation of paying off the debt from agricultural profits alone without recourse to equity. On the other hand, credit market imperfections that increase the shadow price of credit for small producers would reduce small farmers' competitiveness in the land sales market and at the same time outweigh the supervision cost advantage they enjoy.

Asymmetric information and moral hazard lead generally to quantity rationing in credit markets (Stiglitz and Weiss, 1981). Formal credit markets can overcome the problem of asymmetric information by utilizing a collateral requirement. However, the costs of and political impediments to foreclosure on smallholders land are often quite significant. This is part of the generally high transaction costs associated with providing credit to small producers. In informal credit markets, close familiarity and social control is used to select promising clients or projects. This is quite costly as the scope for effective supervision is limited. Furthermore, informal lenders have only limited scope to diversify covariate risks, and they typically do not provide much long term credit. Interest rates on informal loans are thus high. Thus, both limited availability of credit and high cost of borrowing of credit and high cost of borrowing would prevent those whio do not have accumulated savings from acquiring land. 30 Credit market imperfections can thus offset small farmers' supervision cost advantage. For the case of Sudan, for example, yields for virtually all crops are lower for poor (small) farmers and higher for rich (large) farmers, thus turning the farm-size productivity relationship upside down. Furthermore, the lanid rental market leads to land transfers from poor and labor-abundant small holders, to rich and relatively labor scarce households (Kevane 1996). The reason is that capital market imperfections combined with reasonably functioning land and labor markets and a technology that is not supervision intensive make it more attractive for small credit-constrained households to rent out land and work for a wage than to engage in owner-cultivation without capital inputs. By contrast, in panel data from Burkina Faso an inverse farm size-productivity relationship was observed even though a positive presence of correlation between yields and cash inflows from non-agricultural employment suggests the presence of capital market imperfections (Udry 1996). The conclusion is that imperfections in land, labor, credit, and

> **29** Due to the covariance of production risks, crop insurance is very difficult and forward markets to insure against price risk are often unavailable to small producers due to high transaction costs.

> The difficulty of land acquisition through borrowing by would-be smallholders, in spite of their productivity advantage, has been highlighted by Binswanger and Elgin (1998) and Carter and Mesbah (1995). Furthermore, they point out that by exhausting access to credit for land acquisition, the ability to borrow for working capital is eliminated.

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