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Political manipulation of urban land markets: evidence from China

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  • Henderson, J. Vernon
  • Su, Dongling
  • Zhang, Qinghua
  • Zheng, Siqi

Abstract

Over the last forty years, China has experienced extraordinary growth under output market reforms, but the growth rates are now tapering off. Reforms in factor markets and city governance have been much slower and are viewed as having the potential to yield considerable efficiency gains. In this paper, we explore this possibility, tackling the key issues of local political manipulation of land markets and objectives of local leaders, constraints on the local budgetary process to finance infrastructure and capital market favoritism of certain cities. We use a structural general equilibrium model with trade and migration frictions, based on prefecture level data. We model the political process of land misallocation within cities which drives up housing prices and estimate city-by-city local leaders’ preferences over economic performance versus residents’ welfare. Counterfactual analysis shows that equalizing capital prices across cities, changing the political scorecard for city leaders to reward just maximization of local consumer welfare, and relaxing local budget constraints together increase welfare of consumers and returns to capital by 13.7% and 2.25% respectively. Housing prices would decline in almost all cities; and the reforms would reduce the current excessive, often showcase investment in local public infrastructure by 49% nationally. These reforms would significantly reduce the population of favored cities with low capital costs like Tianjin and Beijing and raise the population of cities with high costs of capital and low local-leader weights on consumer welfare like Shenzhen and Dongguan.

Suggested Citation

  • Henderson, J. Vernon & Su, Dongling & Zhang, Qinghua & Zheng, Siqi, 2022. "Political manipulation of urban land markets: evidence from China," LSE Research Online Documents on Economics 124874, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:124874
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    File URL: http://eprints.lse.ac.uk/124874/
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    References listed on IDEAS

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    1. David L. Hummels & Georg Schaur, 2013. "Time as a Trade Barrier," American Economic Review, American Economic Association, vol. 103(7), pages 2935-2959, December.
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    Cited by:

    1. Yingying Tian & Guanghui Jiang & Yaya Tian, 2024. "A New Endogenous–Exogenous Factor Framework to Analyze China’s Distinctive Land Supply Participation in Macro-Control Processes During the 2001–2021 Period," Land, MDPI, vol. 13(12), pages 1-27, November.
    2. Tian, Wenjia & Wang, Zhi & Zhang, Qinghua, 2024. "Land allocation and industrial agglomeration: Evidence from the 2007 reform in China," Journal of Development Economics, Elsevier, vol. 171(C).
    3. Chuantao Cui & Leona Shao-Zhi Li, 2024. "More but not better: Career incentives of local leaders and entrepreneurial entry in China," Working Papers 202417, University of Macau, Faculty of Business Administration.
    4. Henderson, J. Vernon & Thisse, Jacques-François, 2024. "Urban and spatial economics after 50 years," LSE Research Online Documents on Economics 125675, London School of Economics and Political Science, LSE Library.

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    More about this item

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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