The misallocation in the Chinese land market

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Title: The misallocation in the Chinese land market
Author: Fei, Xuan
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 23/2020
Year of publication: 2020
Publication date: 21.10.2020
Pages: 57
Subject (yso): tuottavuus; alueet; kaupungit (hallintoalueet); maa-alueet; maankäyttö; maanhinta; yritykset; sijainti; tehokkuus
Keywords: Bofit-kokoelma; Kiina
JEL: F16; L22; L51; O47; R14; R30
Other keywords: misallocation; agglomeration; firm behaviors; land; productivity; city; China
Abstract: This paper proposes a spatial equilibrium model to quantify welfare losses from land market distortions in China. In the model, heterogeneous firms in a variety of sectors choose their locations across regions with costly trade, frictional labor migration, and land market distortions. We match land transaction and firm-level survey data to estimate land market distortions for firms. Misallocation arises when similar firms are faced with land prices that effectively prevent productive firms from establishing in large cities where they can benefit from agglomeration forces and access to higher productivity. Our framework incorporating land market distortions also helps clarify the mystery of China’s undersized cities, a phenomenon noted by Au and Henderson (2006) and Chauvin et al. (2017). Our estimates suggest large negative effects of land policies on the economic welfare in China. We end with a counterfactual exercise that suggests that a coordinated land and labor migration reform would generate welfare gains and reduce regional inequality.

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