The Costs of Political Manipulation of Factor Markets in China
61 Pages Posted: 12 Sep 2020
Date Written: September 2020
Despite China's economic achievements, factor market reforms have been slow. We analyze local political manipulation of land markets, along with capital market favoritism of certain cities, using a structural general equilibrium model. We estimate city-by-city local leaders' preferences over GDP enhancement versus residents' welfare. Equalizing capital prices across cities would increase worker welfare and returns to capital by 2.6% and 11%, respectively. Further, forcing local leader to focus just on enhancing welfare of residents would increase welfare by another 5.3%. Reforms would significantly reduce the population of favored cities like Tianjin and Beijing, while raising that of cities like Shenzhen.
Suggested Citation: Suggested Citation