Ethnic divisions, contract choice, and search costs in the Guatemalan land rental market

•Estimate joint partner and contract choice in markets with property rights insecurity.•Proposes a new methodology to estimate joint partner and contract choice.•Property rights enforcement can explain market segmentation along ethnic lines.•Property rights insecurity affects efficiency through suboptimal contract choice.

This paper shows how ethnic diversity in a context of weak property rights enforcement can result in market segmentation. The paper analyzes how contract enforcement problems affect the joint decision of partner and contract choice by landlords in the land rental market in Guatemala. The empirical method allows partner choice to be determined not only by the characteristics and relative scarcity of the specific landowner and tenant, but also by the characteristics of other potential tenants. The results show that landowners without formal title are more likely to restrict their partners to tenants from the same ethnic group. Partner choice is found to be less important for renting with interlinked land-labor contracts.