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 Centre for Economic Policy Research

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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