Regional Convergence or Just An Illusion? Place-based Land Policy and Spatial Misallocation
50 Pages Posted: 18 May 2021 Last revised: 15 Jun 2021
Date Written: May 25, 2021
We study how place-based land allocation policy can create spatial misallocation. Such policy may seem to "help the region", but actually hurt workers in the region. Combining microdata and a spatial equilibrium model, we investigate a major policy change of distributing more land to the underdeveloped non-eastern inland regions in China. First, using a method combining RD and DID, we show causal evidence that this inland-favoring policy increased land prices and decreased firm-level TFP in developed eastern regions relative to non-eastern regions. Second, we build a spatial equilibrium model featuring worker mobility and both residential and production floor space constraints. In the model, the inland-favoring policy tightens urban land supply in developed eastern cities, and consequently, prevents workers from migrating there. Counterfactuals reveal that the national TFP and urban output would have been 7.3% and 2.4% higher in 2010 if the policy had not been implemented. Moreover, national-level income inequality would have been reduced by 30\% thanks to more migration to developed cities. The result shows that the inland-favoring policy seems to reduce the regional gap. However, it, in fact, causes TFP and output losses, worsens inequality, and unfavorably hurts workers from underdeveloped regions by hindering their access to higher-paid developed cities.
Keywords: Place-based Policy; Land Policy; Spatial Misallocation; China; Cities
JEL Classification: R58, E24, J61, R52
Suggested Citation: Suggested Citation