Ming Lu, Yuta Suzuki, Xican Xi, Le Xu and Yuejun Zhong, 2024, "Pro-Manufacturing Land Policies of Competing Local Governments: A Quantitative Analysis of China," https://papers.ssrn.com/sol3/papers.cfmabstract_id=4967319
Pro-Manufacturing Land Policies of Competing Local Governments: A Quantitative Analysis of China
We document that local governments in China offer land with substantial discounts for manufacturing relative to services or housing. To explore the rationale and welfare implications, we develop a multi-sector quantitative spatial equilibrium model where local governments allocate land across sectors and segment the land markets to non-cooperatively maximize their local objectives. The model closely replicates the observed land discounts and their variations across regions when local governments aim to maximize local manufacturing output, though welfare is significantly lower than under a unified land market without segmentation. When maximizing local welfare, manufacturing land discounts are smaller but still present. These pro-manufacturing policies are largely rationalized by stronger input-output linkages in manufacturing than in services, with comparative advantage and trade costs influencing their effectiveness. Welfare levels under these policies exceed those in the unified land market and approach cooperative policy outcomes.
Keywords: Quantitative Spatial Economics, Pro-Manufacturing, Chinese Economy, Local Policy, Land Policy