Land Protection, Credit Access, and the Insurance Gap: The De Soto Trap

Werner Hernani ()
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Werner Hernani: Investigador asociado de INESAD

No 05/2026, Development Research Working Paper Series from Institute for Advanced Development Studies

Abstract: Bolivia’s Ley1720(April2026)allowssmallholderstovoluntarilyconvertconstitu- tionally protected pequeña propiedad—land thatcannotbeseizedbycreditors—into pledgeable mediana propiedad, explicitlytargetingthecredit-accesschannelthatHer- nando deSotopopularized.Thispaperdevelopsadynamicmodelshowingthatsuch conversion createsa De Sototrap: thehouseholdsmostlikelytoconvertarethose most desperateforliquidity,notthosebestpositionedtobenefitfromcredit,andthese households facethehighestdefaultprobability.Withoutcomplementaryinsurance, land flowsirreversiblyfromvulnerablesmallholderstothosewithcapitaltopurchase foreclosedproperties.Themodelyieldsthreeresults:(i)adverseselectionintocon- version emergesendogenouslyfromthethresholdconditions;(ii)aggregatesmall- holder landdecaysexponentiallytowardzero—aratchetthatcannotreversewithout policy intervention;(iii)mandatoryinsuranceasaconversionrequirementfiltersout non-viable applicants,boundslandloss,andraisesnetwelfarebyafactoroffour. Calibrated toBolivianagriculturalcensusdata,themodelpredictsthatundercurrent policy,120,000householdswilllosetheirlandwithin25years.Thelawaddressesthe channel (credit)forwhichempiricalevidenceisweakestwhileremovingaprotection (implicit insurance through inalienability) whose value the risk literature suggests is large. Bolivia’s reform inverts the optimal policy sequence.

Keywords: land tenure; credit constraints; insurance; adverse selection; land reform; Bolivia. (search for similar items in EconPapers)
JEL-codes: D86 G21 G22 O12 O16 Q15 (search for similar items in EconPapers)
Pages: 93 pages
Date: 2026-05
New Economics Papers: this item is included in nep-fdg
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