Constant Elasticity Of Transformation Research Articles

Potential impacts of climate change and adaptation in agriculture on poverty: the case of Nepal

The main theme of this paper is to investigate the socio-economic impacts of climate change and adaptation; by comparing the losses with and without land reallocation for major staple foods as a key strategy of climate change adaptation in the farming system. In doing so, a computable general equilibrium (CGE) model for Nepal has been developed, incorporating the allocation of land for several agricultural crops, including the major staple foods, with specification of a nested set of constant elasticity of transformation (CET) functional forms. The set of land transformation elasticities facilitates switching from one crop to another; based on their agronomic characteristics and degree of climate change impacts. Using Global Trade Analysis Project (GTAP) data and Living Standard Survey (LSS) data, a social accounting matrix (SAM) for Nepal is developed and used to simulate three scenarios of climate change and land reallocation. The simulation results in the long run depict farmers as more likely to use land for crops that are comparatively less impacted by climate change, such as paddy. The results further show that land reallocation reduces the income inequality and poverty among rural and urban households by significantly controlling the income losses of marginal farmers.

Land use in computable general equilibrium models

Constant Elasticity of Transformation (CET) functions are widely used to allocate land across uses in Computable General Equilibrium (CGE) models. These models fail to maintain the physical area of land in balance. This paper examines this issue. It shows that heterogeneity in land prices (rents) is the main source of imbalance in land area, not the curvature of the CET function. It also shows that the available approaches that restore balance to physical area either introduce ad hoc adjustments in land allocation or undermine the conventional welfare assessments of the CET results. An alternative approach involves implementing stochastic productivity distribution functions (e.g. Fréchet) to allocate land among uses maintain area of land in balance, thereby respecting conventional welfare assessments. A particular feature of these models is that the aggregate production functions of the land using sectors exhibit decreasing returns to scale even if land is the only factor of production. This approach also requires equalization of land rents across uses. This is not consistent with empirical observation. Both the CET and stochastic methods consider the implicit opportunity costs of moving land across uses but fail to take into account preparation costs associated with land use conversion.

THE CRITICAL ROLE OF CONVERSION COST AND COMPARATIVE ADVANTAGE IN MODELING AGRICULTURAL LAND USE CHANGE

The difference in land use modeling approaches is an important uncertain factor in evaluating future climate scenarios in global economic models. We compare five widely used land use modeling approaches: constrained optimization, constant elasticity of transformation (CET), the additive form of constant elasticity of transformation (ACET), logit, and Ricardian. We demonstrate that the approaches differ not only by the extent of parameter uses but also by the definition of conversion cost and the consideration of comparative advantage implied by land heterogeneity. We develop a generalized hybrid approach that incorporates ACET/logit and Ricardian to account for both conversion cost and comparative advantage. We use this hybrid approach to estimate future climate impacts on agriculture. We find a welfare loss of about 0.38–0.46% of the global GDP. We demonstrate that ignoring land heterogeneity or land conversion costs underestimates climate impacts on agricultural production and welfare.

On constant elasticity of substitution – Constant elasticity of transformation Directional Distance Functions

This paper aims to present non-linear CES (Constant Elasticity of Substitution)–CET (Constant Elasticity of Transformation) Directional Distance Functions. These measures inherit the structure of the standard Directional Distance Functions and that of the CES–CET technology. These functions allow non-parametric estimation of efficiency scores through linear programming method. Besides, the CES –CET technology gives the opportunity to explore α-returns to scale assumption for the new distance functions. The duality theory is investigated through pseudo profit, cost and revenue functions. The dual standpoint provides non-linear adjusted prices that can occur into non-linear pricing practices. An application is proposed to give an illustrative example of the primal CES–CET Directional Distance Functions.

Climate change adaptation in agriculture: A computable general equilibrium analysis of land-use change in Nepal

This paper investigates the feasibility of changes in cropland-use as an adaptation strategy to minimise the economy-wide costs of climate change on agriculture. Nepal makes an interesting case study as it is one of the most vulnerable agricultural economies within South Asia. We develop a comparative static multi-household computable general equilibrium (CGE) model for Nepal, with a nested set of constant elasticity of transformation (CET) functional forms, to model the allocation of land within different agricultural sectors. Land transformation elasticities in these CET functions are allowed to reflect the ease of switching from one crop to another based on their agronomic characteristics. The results suggest that, in the long run, farmers in Nepal tend to allocate land to crops that are comparatively less impacted by climate change, such as paddy, thereby minimising the economy-wide impacts of climate change. Furthermore, the results reveal that land-use change tends to reduce the income disparity between different household groups by significantly moderating the income losses of marginal farmers. Therefore, it is suggested that policy makers in Nepal should prioritise schemes such as providing climate-smart paddy varieties (i.e., those that are resistant to heat, drought and floods) to farmers, subsidising fertilizers, improving agronomic practices, and educating farmers to switch from crops that are highly impacted by climate change to those that are not, such as paddy.

INTEGRATION OF GENERAL AND PARTIAL EQUILIBRIUM AGRICULTURAL LAND-USE TRANSFORMATION FOR THE ANALYSIS OF CLIMATE CHANGE IN THE MEDITERRANEAN

This study presents an internal modification of a dynamic computable general equilibrium model, ICES, employing inputs from a partial equilibrium model for the agricultural sector, VALUE. The aim is to quantify and analyze the medium-term socio-economic consequences of projected climate change. The methodology is innovative as it combines state-of-the-art knowledge from economic and biophysical sources and is demonstrated in application to two Mediterrenean countries: Israel and Italy. The information from the VALUE model was incorporated into the ICES economic model to improve the agricultural production structure. The new land allocation method takes into account the variation of substitutability across different types of land use. It captures agronomic features included in the VALUE model. This modification gives a better representation of heterogeneous information of land productivity to the economic framework. Climate impacts and policy evaluation with ICES are reinforced due to the more refined system of land allocation. This exercise is original in its ability to base the analysis on empirically estimated parameters rather than on assumptions, as in other studies of this kind. Notably, we suggest diverse land Constant Elasticity of Transformation (CET) frontiers for two main ecological regions in the Mediterranean basin for a more accurate representation of agronomic characteristics. Using the modified ICES model we evaluate climate change impact on agricultural production in the Mediterranean region.

Disaggregated data and trade policy analysis: The value of linking partial and general equilibrium models

Computable General Equilibrium (CGE) models are now routinely utilized for the evaluation of trade policy reforms, yet they are typically quite highly aggregated, which limits their usefulness to trade negotiators who are often interested in impacts at the tariff line. On the other hand, Partial Equilibrium (PE) models, which are typically used for analysis at disaggregate levels, deprive the researcher of the benefits of an economy-wide analysis, which is required to examine the overall impact of broad-based trade policy reforms. Therefore, a PE–GE, nested modeling framework has the prospect of offering an ideal tool for trade policy analysis. In this paper, we develop a PE model that captures international trade, domestic consumption and output, using Constant Elasticity of Transformation (CET) and Constant Elasticity of Substitution (CES) structures, market clearing conditions and price linkages, nested within the standard GTAP model. In particular, we extend the welfare decomposition of Huff and Hertel (2001) to this PE–GE model in order to contrast the sources of welfare gain in PE and GE analyses. To illustrate the usefulness of this model, we examine the contentious issue of tariff liberalization in the Indian auto sector, using PE, GE and PE–GE models. Both the PE and PE–GE models show that the imports of motorcycles and automobiles change drastically with both unilateral and bilateral tariff liberalization by India, but the PE model does a poor job predicting the overall size and price level in the industry, post-liberalization. On the other hand, the GE model overestimates substitution between regional suppliers due to “false competition” and underestimates the welfare gain, due to the problem of tariff averaging in the aggregated model. These findings are shown to be robust to wide variation in model parameters. We conclude that the linked model is superior to both the GE and PE counterparts.

Product diversification and attitudes toward risk in agricultural production

In this article we analyze the relationship between risk-avoidance behavior and economic jointness in a multi-output agricultural technology. We focus on farmer specific heterogeneity in attitudes towards risk-taking, while treating production uncertainty as unobserved stochastic error that is common to all region specific farms. We furthermore utilize a new flexible functional form, the Constant Elasticity of Transformation, Constant Elasticity of Substitution, Generalized Leontief (Behrman, Lovell, Pollak, and Sickles, [1992]) which has the appealing property of relative flexibility while ensuring proper curvature properties of the estimated multi-output technology over a larger sample region of the price/quantity space than a flexible form such as the Generalized Leontief [Diewert, 1971].

The Constant Elasticity of Transformation Production Frontier and Linear Supply System

IN THIS PAPER we define the elasticity of transformation analogously with the elasticity of substitution. We derive the family of CET (constant elasticity of transformation) production possibility schedules which (not surprisingly) turn out to be algebraically identical with CES isoquants, apart from a difference of sign determining their concavity.2 We show that a given, constant, elasticity of transformation is compatible with product-neutral and product-biased shifts in the location of the frontier, pointing out that CET model therefore is of potential value in the analysis of technical change.3 Finally, we suggest a possible application of the CET model in the empirical analysis of supply, quoting by way of illustration the results of an empirical three-sector agricultural supply model fitted to post war Australian data.