Working Paper（23-014E）Unbalanced Growth, Elasticity of Substitution, and Land Overvaluation

We study the long-run behavior of land prices when land plays the dual role of factor of production and store of value. In modern economies where technological progress is faster in non-land sectors, when the elasticity of substitution in production exceeds 1 at high input levels (which always holds if non-land factors do not fully depreciate), unbalanced growth occurs and land becomes overvalued on the long-run trend relative to the fundamental value defined by the present value of land rents. Around the trend, land prices exhibit recurrent stochastic fluctuations, with expansions and contractions in the size of land overvaluation.

Keywords : asset price, elasticity of substitution, land, unbalanced growth.

JEL codes : D53, G12, O41.