The local and aggregate effects of land-use regulation on farmland protection

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 highlight the substantial welfare costs that can arise from suboptimal land-use policies, underscoring the need for careful design in fast-growing economies.