Understanding Investor Behavior in the Recent Global Land Rush

Abstract

A sharp rise in land acquisitions in developing countries during the last decade has drawn the attention of scholars and think tanks. Recent empirical literature finds that investors acquiring land tend to target countries that have little regard for local land rights. This is a puzzle. By locating in such countries, investors may be foregoing other advantages that generate more revenue. In this paper, I provide an explanation of investor behavior using a game-theoretic model where investors can use expropriation as a credible threat vis a vis smallholders. I show that the credible threat of expropriation lowers the investor’s cost of locating to a country by reducing the necessary remuneration to smallholders for access to land, resulting in adverse incorporation. Further, I demonstrate that investors will locate in countries with weak land governance whenever they anticipate similar levels of revenue or investor protection.