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Abstract
In computable general equilibrium (CGE) models, it is typically assumed that
agricultural resources are smoothly substitutable in neoclassical production or
cost functions, with flexible wages, rents and prices generating market equilibrium
in a setting with full resource employment. 1 Although this specification is
often adequate, it is also often inadequate, especially when the analysis focuses
on resource allocation and production technology issues. With more
disaggregation, which is becoming common in CGE models with an agricultural
focus, the use of smooth, twice-differentiable, production or cost functions
to specify agricultural technology is increasingly unrealistic. The purpose of
this paper is to show how CGE models formulated as non-linear mixedcomplementarity
(MC) problems can incorporate alternative, more realistic,
specifications of agricultural technology and supply, drawing on the extensive
literature on mathematical programming models applied to agriculture.2
First, we present a stylized standard neoclassical CGE model, which is then
extended to a CGE-MC format to include Leontief (activity analysis) technology,
endogenous determination of the market regime for agricultural factors
(unemployment or full employment) and inequality constraints on agricultural
factor use. In an analysis of reduced agricultural water supplies in Egypt, it is
then shown how such a model can generate realistic results concerning water
use and productivity that cannot be captured in a standard CGE model. The
main conclusion is that, in analyses focused on agricultural supply issues,
CGE-MC models that selectively incorporate features from the mathematical
programming literature offer a powerful alternative to standard models. The
underlying producer optimization problems for the different situations are
presented in an Appendix.