Land Value and Rent Dynamics in an Integrated Walrasian General Equilibrium and Neoclassical Growth Theory

Abstract

This paper is concerned with relationship between growth and land value change. It builds a heterogeneous-households growth model with endogenous wealth accumulation and fixed non- depreciating asset (land) in an integrated Walrasian general equilibrium and neoclassical growth theory. The production side consists of one service sector and one industrial sector. We use an alternative utility function proposed by Zhang, which enable us to develop a dynamic growth model with genuine heterogeneity. The wealth and income inequality is due to household heterogeneity in preferences and human capital as well as the households’ initial wealth. This is different from the standard Ramsey-type heterogeneous-households growth models, for instance, by Turnovsky and Garcia-Penalosa (2008), where agents are heterogeneous only in their initial capital endowment, not in preference or/and human capital. We build a model for any number of types of household and provide a computational procedure for simulating model. For illustration we simulate the model for the economy with three types of households. We simulate the motion of the national economy and carry out comparative dynamic analysis. The comparative dynamic analysis provides some important insights. For instance, as the rich group increases its propensity to save, the GDP and land value are increased. In the long term the group accumulates more wealth, consumes more goods and services and accumulates more wealth. But in the long term the other two groups suffer from the rich households’ preference change as their lot sizes, consumption levels of services and goods, and wealth are all reduced.