Land Acquisition and Sectoral Composition: Evidence from India

Abstract

Fragmented land ownership and ill-defined property rights are key obstacles to large-scale industrial development in emerging economies. To facilitate private investment, governments increasingly rely on compulsory land acquisition policies. I study the effect of this practice on industrial composition and local employment, exploiting an unexpected reform that prohibited compulsory acquisition for Indian Special Economic Zones (SEZs). I pin down the effect on entry by constructing a novel dataset on the universe of SEZ proposals before and after the reform. First, I find that the share of manufacturing SEZ proposals, and the share of developed manufacturing SEZs, decreases by almost 50 percent. This effect is most pronounced for (a) more land-intensive industries and (b) areas with higher land fragmentation. Second, I study how restricting compulsory acquisition affects employment in and around SEZs, and find that manufacturing SEZs after the reform are associated with significantly higher local employment than SEZs before the reform. Despite the reduction in entry, post-reform manufacturing SEZs contributed four times more to aggregate employment than their pre-reform counterparts.