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The misallocation in the Chinese land market

Xuan Fei

No 23/2020, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

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

Keywords: Misallocation; agglomeration; firm behaviors; land; productivity; city; China (search for similar items in EconPapers)
JEL-codes: F16 L22 L51 O47 R14 R30 (search for similar items in EconPapers)
Date: 2020
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