Farm incomes in rural Vietnam are tightly constrained by very small farm sizes. Stringent limits on the area of cropland that individuals may own means that farmers need a well‐functioning rental market to consolidate land parcels, grow their farm enterprises, adopt new technology and increase incomes. This research investigates the efficiency and equity impacts of the rental market in rural Vietnam and attempts to identify transaction costs impeding the market. A generalised ordered logit model with shifting thresholds allowing transaction costs to impact lessors and lessees differently was specified and estimated using data extracted from the Vietnam Household Living Standards Surveys. The findings show that rental transactions reduced imbalances in factor endowments, transferring cropland to households that were relatively land‐poor but more willing and able to farm. However, the market is constrained by transaction costs that affect lessors and lessees differently. It is recommended that government should complete its land registration program and relax restrictions on the use of wetlands to grow crops other than rice. It should also improve access to all‐weather roads as this encourages participation on both sides of the rental market, whereas better access to communications infrastructure was found to promote only the supply side.
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