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    Bank of Finland, Rauhankatu 19 B, Helsinki

Xuan Fei (University of California, Davis): Misallocation in Chinese Land Market

Abstract
We quantify the welfare losses of land market frictions in China by proposing a spatial equilibrium model where heterogeneous firms in a variety of sectors choose their locations across regions with costly trade, labor migration frictions, and land distortions. We match the land transaction and firm-level survey data to estimate land distortions for firms. Misallocation arises because similar firms are faced with various land prices, which effectively preventing more productive firms to choose bigger cities where they could benefit from agglomeration forces and access to higher productivity. Our framework incorporating land market frictions could explain the undersized cities in China, which is pointed out 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. Further counterfactual exercise indicates that land reforms conducted together with labor migration reforms in China could generate larger welfare gains and smaller regional inequality at the same time.

 

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