Working Paper: NBER ID: w1512
Authors: Jonathan Eaton
Abstract: Land and capital serve not only as factors of production but as assets which households use as stores of value. Standard trade models typically recognize only the first role. In its role as an asset land reduces the amount of national savings available for capital investment. Foreign investment affects the national economy through both asset markets and factor markets. When the share of labor in the land-using sectoris large relative to the labor share in the capital-using sector, factor-market effects are likely to dominate. In this case a drop in the price of the agricultural good or a rise in the land-labor ratio attracts foreign investment, while a drop in the world interest rate raises the welfare of a capital-importing country. If the share of labor in the land-using sector is smaller, however, asset-market effects dominate. These results are then likely to be reversed. Even when trade in claims on land equalizes the domestic and world interest rates, a tax on land raises steady-state welfare.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign ownership of land (exogenous increase) (Q15) | domestic capital stock (E22) |
| domestic capital stock (E22) | real wage (J31) |
| real wage (J31) | interest rate (E43) |
| interest rate (E43) | rent on land (Q15) |
| Foreign ownership of land (exogenous increase) (Q15) | welfare (I38) |
| land tax (R51) | steady-state welfare (D69) |
| land tax (R51) | capital stock (E22) |
| relative price of agricultural goods (Q11) | foreign ownership of land (H13) |
| relative price of agricultural goods (Q11) | steady-state welfare (D69) |