A substantial proportion of agricultural land in Sri Lanka is publicly owned and privately farmed
under lease arrangements that impose strict restrictions on land sales, rental, mortgage, subdivision
and succession through inheritance. This paper investigates the e§ect of these leases on employment
diversiÖcation and wages. The structural estimation utilizes spatial variations in the incidence of these
leases and identiÖes the causal e§ect through a combination of instrumental variable and control
function approaches. The empirical results suggest a signiÖcant adverse e§ect of these leases on
wages and employment diversiÖcation out of agriculture. The adverse e§ect is more pronounced in
areas closer to large urban markets. The mobility barriers created by land restrictions thus lead to
poor integration of labor market across areas and a slower sectoral transition from farm to non-farm
activities.