The Impact of Institutional and Land Use Change on Local Incomes in Chilean Patagonia

Many developing rural economies depend on natural capital stocks for generating income and wealth. However, common property natural resources are often over-exploited. One method of solving over-exploitation is privatisation of the resource. In Palena, Chile, the privatisation of common-property grazing land facilitated a change in land use from grazing to tourism activities. We present a theoretical model that demonstrates that privatisation that leads to land use change has the potential to increase local wages. To resolve theoretical ambiguities, we calibrate a local general equilibrium model and find that privatisation and a switch to tourism resulted in higher wages in the local economy of Palena. This finding contributes to the ongoing investigation of the local costs and benefits of resource privatisation in developing countries.