China's efficient urban bias

This paper develops a dynamic general equilibrium model with endogenous rural–urban migration to analyse the provision of rural and urban government services in China, with special emphasis on the role of the household registration (hukou) system in shaping its urbanization process. It argues that China's urban bias policy, which is enabled by the hukou system restricting rural–urban migration, did not necessarily reduce economic efficiency. Rather, it might have only raised urban welfare at the expense of rural residents. As the hukou system also ties people to particular geographical locations, this paper argues that China's continuous bias towards coastal and big cities has started to cause economic inefficiency as well as inequality. It suggests that progressive hukou reform reducing barriers to cross‐region migration would improve economic efficiency and welfare.