Modeling land physically in CGE models: new insights on intensive and extensive margins

The constant elasticity of transformation (CET) functional form has been widely used in CGE models for handling land heterogeneity. However, the CET approach cannot provide traceable land use change results since land productivity changes due to land transformation are implicitly adjusted by shifting effective land supply so that results are “effective land” rather than physical land. In this study, we proposed a framework in which land transformation is physically modeled using the additive CET (ACET) approach while land productivity changes due to transformation are adjusted from land demand in production. We decomposed land productivity changes technical shifters using ACET. We demonstrated that implementing a same land productivity change technical shifter from either land supply side or land demand side are equivalent in non-land market equilibrium. For the purpose of this study, we build a simple CGE model and design experiments to comparing CET with ACET and to testing the sensitivity of two new margin responses including land productivity response due to transformation and the multiple cropping and unused land response. We demonstrated that the ACET approach plus the land productivity adjustments provide a promising alternative to the CET approach in modeling land supply in CGE model, despite that more careful studies are necessary for calibrating parameters for important responses.