This article examines the determinants of forest cover and land use efficiency in a shifting cultivation system. A conceptual model demonstrates that liquidity constraints encourage farmers to allocate more land to forest fallow and less to cultivation by limiting input purchases. Data from farm households in the Eastern Brazilian Amazon allow me to test whether farmers allocate land between cropping and fallow efficiently from an individual or a community perspective. I find that many farmers devote more land to fallow than is privately optimal, benefiting community income as a whole due to positive local externalities provided by secondary forest. I also estimate the effect of a variety of socioeconomic and agroecological factors on fallow allocation and land use efficiency. I find over-fallowing to be negatively associated with commercial credit use, suggesting that liquidity constraints do hinder agricultural intensification.


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