Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market
56 Pages Posted: 10 Sep 2016 Last revised: 2 Mar 2018
Date Written: January 2018
This study documents the presence of local protectionism and quantifies its impacts on market competition and social welfare in the context of China’s automobile market. A salient feature of China’s auto market is that vehicle models by joint ventures (JVs) and especially state-owned enterprises (SOEs) command much higher market shares in their headquarter provinces than at the national level. Through spatial discontinuity analysis at provincial borders, falsification tests, and a consumer survey, we uncover protective policies such as subsidies to local brands as the primary contributing factor to the observed home bias. We then set up and estimate a market equilibrium model to quantify the impact of local protection, controlling for other demand and supply factors. Counterfactual analysis shows that local protection leads to significant choice distortions and modest price increases, resulting in 20.9 billion yuan of consumer welfare loss that amounts to 41% of total subsidy. Provincial governments face a prisoner’s dilemma: local protection reduces aggregate social welfare, but provincial governments have no incentive to unilaterally remove local protection.
Keywords: Local Protectionism, Regression Discontinuity, Market Equilibrium Model, Welfare
JEL Classification: D43, H71, L62
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