The Costs of Political Manipulation of Factor Markets in China

55 Pages Posted: 9 Nov 2020 Last revised: 13 Nov 2020

See all articles by J. Vernon Henderson

J. Vernon Henderson

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

Dongling Su

Boston University, College of Arts and Sciences, Department of Economics, Students

Qinghua Zhang

Peking University - Guanghua School of Management

Siqi Zheng

Samuel Talk Lee Professor of Urban and Real Estate Sustainability, Faculty Director of MIT Center for Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2020

Abstract

China over the last forty years has undergone massive reform in output markets and experienced extraordinary economic growth. However, reforms of factor markets and city governance are much slower. In this paper, we tackle the key issue of local political manipulation of land markets and the objectives of local leaders, along with capital price favoritism of certain cities and migration frictions, using a structural general equilibrium model based on prefecture level data. In doing so, we model the political process of land misallocation within cities which drives up housing prices and estimate city-by-city local leaders’ preferences over economic performance versus resident’s welfare. Counterfactual analysis shows that equalizing capital price across cities increases national social welfare and returns to capital by 2.6% and 11%, respectively. Further correcting the distortion of local leader’s preference towards GDP would increase residents’ welfare by another 5.3%. These reforms would significantly reduce the population of cities like Tianjin and Beijing, which are currently favored in capital allocations, and raise the population of cities like Shenzhen, which leaders seem to be more incentivized to focus on GDP enhancement, rather than consumer welfare.

Suggested Citation

Henderson, J. Vernon and Su, Dongling and Zhang, Qinghua and Zheng, Siqi, The Costs of Political Manipulation of Factor Markets in China (August 1, 2020). MIT Center for Real Estate Research Paper No. 6, Available at SSRN: https://ssrn.com/abstract=3726863 or http://dx.doi.org/10.2139/ssrn.3726863

J. Vernon Henderson

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

Dongling Su

Boston University, College of Arts and Sciences, Department of Economics, Students ( email )

270 Bay State Road
Boston, MA
United States

Qinghua Zhang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Siqi Zheng (Contact Author)

Samuel Talk Lee Professor of Urban and Real Estate Sustainability, Faculty Director of MIT Center for Real Estate ( email )

Building 9-323
Cambridge, MA 02139
United States

HOME PAGE: http://https://siqizheng.mit.edu/

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