# **1. Introduction**

Few interventions have been as passionately debated or subject to a larger number of policy restrictions than the operation of land sales markets. Proponents argue that the ability to sell land in a freely operating market is crucial not only to maximize productivity of land use and facilitate optimal resource allocation, but also for financial market development, by allowing use of land as collateral and thus a reduction of the cost of providing credit. The government should, it is thus argued, strive to set a framework within which land markets can operate and otherwise adopt a laissez-faire approach. Opponents retort that land is “much more than a commodity” and that, with multiple imperfections in other markets, free operation of land markets will often not enhance efficiency. They often maintain that historic inequalities in land access, together with the danger of distress sales and tendencies towards speculative acquisition and thus concentration of land will imply that, unless the government intervenes or even prohibits land sales, operation of such markets will have undesirable social and economic effects.

Although theoretical models putting land sales markets into the general context of a household’s choice of an optimum asset portfolio can lead to widely divergent outcomes, empirical evidence to assess the extent to which these correspond to actual outcomes – and key underlying factors – is often scant. In fact, as land sales markets are normally very thin, large or sufficiently long samples will be required to be able to observe causes and consequences of land market participation. Existing studies are often based on comparatively small samples (Sarap 1995, Lanjouw and Stern 1998) or rely on retrospective information (Baland _et al._ 2007). The implied selectivity and lack of initial characteristics makes it in many cases difficult for analysis to go beyond simple descriptive statistics or transition matrices with little scope to help identify underlying factors and thus provide much-needed insight to enlighten the policy debate.

In this paper, we use the case of India to examine the mechanisms underlying the operation of land sales markets and their longer-term impact in comparison to non-market mechanisms to obtain land. We use a large panel data set spanning almost 20 years to provide information on initial household-level conditions, complementing this with rainfall data to construct a measure of climatic shocks. Descriptively, this allows us to compare changes in wealth, landholdings, and expenditure between groups of land market participants (purchasers, sellers, and those remaining in autarky). Availability of the same type of information for participants in non-market transactions facilitates comparison of the functioning, characteristics of participants, and longer-term impact of transfers through land sales and purchase markets with those of transfers affected through non-market channels. An ordered probit model provides a basis to assess determinants of demand and supply of land for sale or purchase simultaneously, recognizing that factors affecting participation decisions are likely to be different from those affecting the magnitude of demand or supply for those who participate. This can be used to make inferences on likely 2