The Visible Hand and the Invisible Hand in China’s Industrial Land Market Post-2007

Abstract

This paper investigates how market forces and government preferences have jointly shaped China’s industrial land sale prices since 2007, when industrial land transactions were required to be conducted via public auction where firms competitively bid for land supplied by governments. We develop a monopoly-supply model in which local governments who care about both land sales revenues and local industrial development decide on land supply to various industries, and upper-level governments regulate the local market through imposing minimum price constraints, which in turn generates equilibrium land price schedules. Our empirical results demonstrate that while market forces drove up land sale prices after 2007, the role of the visible hand of government was non-negligible. Industries that can generate stronger spillover effects to local incumbents through agglomeration economies were favored in land allocation by governments. These preferences depressed land sale prices and made downward adjustments of the minimum price limits more likely. We also find significant regional differences in the industry preferences of local and upper-level governments, suggesting different roles played by multi-level governments in China’s industrial development.

Keywords: Industrial land market; Price determination; Price regulation; Concentration and coagglomeration; Industrial policy

JEL Classification: R1, R52, H7