DP10957 Social Ties and the Efficiency of Factor Transfers
We introduce a novel way of testing whether social and geographical proximity helps or hinders efficiency-enhancing factor transfers. The approach is implemented empirically using unusually rich data collected in The Gambia. We find that membership to the same ethnic group or kinship network is associated with fewer efficient transfers. This is primarily driven by land transfers from a few large land-owners. If the presence of large landowners is controlled for, the finding is reversed. There are more efficiency-enhancing land transfers between kin-related households and between neighbors. Labor transfers are not found to equilibrate factor ratios across households. But we do not rule out that they serve a beneficial role, e.g., to deal with unanticipated health shocks. Allocative efficiency in land and labor is not achieved at the village level, which suggests that social ties are not sufficiently fluid to permit a fully efficient reallocation of factors of production within villages.