Institutions in Theories of Land Markets: Illustrated by the Dutch Market for Agricultural Land

Theories of land markets should be intellectually sound and should be able to explain and predict market outcomes, such as price and volume of transactions, changes in these and locations of different land uses. Theories based on neo-classical economics, which largely ignore the role of institutions, are not intellectually sound because it is known that markets cannot work without institutions. Nor do these theories predict outcomes satisfactorily. Moreover, they assume market mechanisms and do not investigate them critically. This paper explores how institutions may be taken into account in theories of land markets and whether that leads to better theories both of market outcomes and of market processes. New institutional economics provides the tools to investigate how the interactions between market actors are influenced by institutions. And the 'old' institutional economics emphasises how institutions influence the motivations and preferences of those actors. The conclusion is that there cannot be a general theory of land markets, only theories with a limited applicability and scope. Such theories can be used to explain the effects of small changes and to predict the effects of marginal changes in institutions. In that latter use, these theories can be used for designing land policy. How institutions can be incorporated into theory is illustrated by analysing the Dutch market for agricultural land. This shows how institutions affect the outcomes in that market and the consequences for the transformation of land from agriculture to urban use.