RETHINKING THE DEMAND FOR INSTITUTIONAL INNOVATION LAND RIGHTS AND LAND MARKETS IN THE WEST AFRICAN SAHEL

In contrast to literature which focuses on the how collective action problems inhibit the supply of efficient institutions, this paper uses dynamic stochastic general equilibrium methods to study the demand for institutional innovation. Focusing on the innovation of alienabile land rights in the West African Sahel, this microeconomic approach offers several contributions to the theory of institutional innovation. First, in contrast to the representative agent or aggregate benefit-cost approaches used to derive the demand for institutional innovation in much of the literature, this paper explores the heterogeneity of demand across agents. Second, in contrast to prior studies of the evolution of land rights, this analysis shows that, in West Africa at least, the demand for private property rights in land is likely to rest on more than generalized land scarcity. Indeed, in terms of this paper's dynamic option value metric, the strongest demand for a land market emanates from the collapse of traditional risk management institutions and the desire of low wealth agents to use the market to buffer unmediated production risk. The demand for marketable rights, and indeed the appearance of some land transactions, may ultimately reflect a displaced demand for the innovation of contingency and other financial markets. In this second best environment, a policy of land privatization may be dominated by a policy that addresses those elements in the economic and institutional environment which create the sharp (displaced) demand for marketability rights.