China's Land Market Auctions: Evidence of Corruption

52 Pages Posted: 16 Jun 2009 Last revised: 4 Sep 2010

See all articles by Hongbin Cai

Hongbin Cai

Peking University - Guanghua School of Management

J. Vernon Henderson

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER)

Qinghua Zhang

Peking University - Guanghua School of Management

Date Written: June 2009

Abstract

This paper studies the urban land market in China in 2003--2007. In China, all urban land is owned by the state. Leasehold use rights for land for (re)development are sold by city governments and are a key source of city revenue. Leasehold sales are viewed as a major venue for corruption, prompting a number of reforms over the years. Reforms now require all leasehold rights be sold at public auction. There are two main types of auction: regular English auction and an unusual type which we call a "two stage auction". The latter type of auction seems more subject to corruption, and to side deals between potential bidders and the auctioneer. Absent corruption, theory suggests that two stage auctions would most likely maximize sales revenue for properties which are likely to have relatively few bidders, or are "cold", which would suggest negative selection on property unobservables into such auctions. However, if such auctions are more corruptible, that could involve positive selection as city officials divert hotter properties to a more corruptible auction form. The paper finds that, overall, sales prices are lower for two stage auctions, and there is strong evidence of positive selection. The price difference is explained primarily by the fact that two stage auctions typically have just one bidder, or no competition despite the vibrant land market in Chinese cities.

Suggested Citation

Cai, Hongbin and Henderson, J. Vernon and Zhang, Qinghua, China's Land Market Auctions: Evidence of Corruption (June 2009). NBER Working Paper No. w15067, Available at SSRN: https://ssrn.com/abstract=1418925

Hongbin Cai

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

J. Vernon Henderson (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Qinghua Zhang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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