Urbanization and Agricultural Structural Adjustments: Some Lessons from European Cities

Urbanization presents both opportunities and challenges to agriculture. This paper analyzes the effect of urbanization on the structure and profitability of agriculture at the rural-urban fringe. We develop a theoretical model accounting for changes in the amount of urban development, the level of fragmentation, and population density associated with urbanization. We show that urbanization not only affects the land allocation between traditional and highvalue crops, but also changes relative input and output prices for the two types of crops. We conduct an empirical analysis to estimate the effect of increasing population density and urban fragmentation on farm returns for a set of European metropolises using a Bayesian averaged model that deals with model uncertainty. Our results show that increasing population density increases farm returns while increasing land fragmentation may have a detrimental effect in the beginning but a positive effect for high levels of fragmentation.