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Abstract

This paper develops a structural micro-econometric model of farmland allocation that is linked to a market-level equilibrium model. The farmland-allocation model accounts for the presence of corner solutions in land allocation decisions, which enables using micro-level data for the estimation, and thereby allows treating prices as exogenous. Under partial equilibrium in the markets of vegetative products, the integrated model is then used to simulate the impacts of climate change on production, prices, agricultural profits and consumer surplus, while making explicit the production responses of the micro units used for estimating the land allocation model. We apply the model to Israeli data, and evaluate the combined effects of climate-change and implementation of a less trade-distorting agricultural support policy; specifically, the removal of import tariffs. We obtain negative impacts of climate change on farm profits and consumer’s surplus. Also, trade liberalization increases the overall welfare loss. We show that this conclusion is reversed if the link between the micro- and market-level models fails to capture heterogeneous production responses, thereby yielding an erroneous policy recommendation with respect to trade liberalization.

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