The Local and Aggregate Effects of Land-Use Regulation on Farmland Protection

Abstract

This paper studies the distortionary effects of land-use regulations that preserve farmland from urban sprawl. I exploit a major policy restricting farm-to-urban land conversion in China -- the Farmland Red Line Policy -- to provide causal evidence on the negative impact of land-use regulation on local development, measured by GDP and population growth. To understand the aggregate impact of the policy, I develop a quantitative spatial equilibrium model that features endogenous land-use decisions. The calibrated model reveals a 7% loss in workers' welfare due to the policy. Furthermore, a cap-and-trade platform that allows local regions to exchange farmland preservation requirements can eliminate 60% of workers' welfare costs. The results suggest that fast-growing economies need to design land-use policies carefully, as the welfare costs of poorly designed policies can be substantial.

Keywords: Land-Use Regulation, Economic Development, Urbanization, Spatial Equilibrium, Farmland Protection