The Costs of Political Manipulation of Factor Markets in China

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

No 15247, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Despite China’s economic achievements, factor market reforms have been slow. We analyze local political manipulation of land markets, along with capital market favoritism of certain cities, using a structural general equilibrium model. We estimate city-by-city local leaders’ preferences over GDP enhancement versus residents’ welfare. Equalizing capital prices across cities would increase worker welfare and returns to capital by 2.6% and 11%, respectively. Further, forcing local leader to focus just on enhancing welfare of residents would increase welfare by another 5.3%. Reforms would significantly reduce the population of favored cities like Tianjin and Beijing, while raising that of cities like Shenzhen.

Date: 2020-09
New Economics Papers: this item is included in nep-fdg
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