Essays on the Political Economy of Land Use Change

Abstract: This thesis consists of three articles. The two first ones construct theoretical models for land use change between agriculture and forestry in the presence of lobbies representing both sectors. The third article tests empirically the hypothesis forwarded in the first essay. In the first essay we assume that agricultural land use causes a negative externality as compared to forestry. The government attempts to internalize this with the help of a land tax on agriculture. The tax affects the allocation of land between agriculture and forestry. We find that in social optimum the government imposes a land tax on agriculture because of the negative externality. In political optimum, if lobby groups organize in the agricultural and forestry sectors, their land demand elasticities determine whether land will be taxed or subsidized. Then, if land demand in agriculture is inelastic enough, land might be subsidized. This is contrary to the received public economics wisdom of taxing goods with low elasticities and constitutes a political economy avenue through which the elasticity of land demand affects the tax rate. We further show that if there is technological progress in agriculture, land demand by agriculture increases and land demand by forestry falls. Then, it would be socially optimal for the land tax to increase in technology, but in the political optimum, i.e., if the government is susceptible to lobbying, the tax rate will rather fall. This reallocates more than a socially optimal amount of land from agriculture to forestry. In the second essay we examine the determination of domestic trade policy when the world market price of food changes and affects land demand by the agricultural and forestry sectors when forestland, besides producing private goods, also produces a positive externality. We find that an increase in the price of food raises the value of land, which redistributes land towards the agricultural sector. It further increases the agricultural lobby's clout and reduces that of the forestry lobby. The agricultural lobby's political contribution increases and that by the forestry lobby falls, which raises the relative tariff rate on agriculture. The resulting deforestation in the political equilibrium is excessive from a social point of view, and may be higher than would be the case if the relative world market prices prevailed also domestically. It further gives a country a perceived comparative advantage in agricultural production. These results are not changed by the inclusion of an exogenous land use subsidy to forestry, or if we consider an umbrella lobby group that solves the conflict between the two competing lobbies internally. In the third essay we test the hypothesis that governments determine the taxation of agricultural land by taking into account both contributions by agricultural and forestry lobbies, and social welfare. We find empirical support to our hypothesis that a strengthening of the agricultural lobby lowers the land tax and that environmental concerns affect the tax, the effect being exponential rather than linear. We further find some evidence for the hypothesis that technological progress affects land taxation. The effect works through the effect of technology on the negative externality produced by the agricultural sector. Finally, we find some support for a hypothesis suggesting that richer farmers lobby more and consequently get a higher land subsidy.