Regional Convergence or Just An Illusion? Place-based Land Policy and Spatial Misallocation

50 Pages Posted: 18 May 2021 Last revised: 15 Jun 2021

See all articles by Min Fang

Min Fang

HEC Lausanne; Geneva Finance Research Institute

Libin Han

Dongbei University of Finance and Economics

Zibin Huang

Department of Economics, University of Rochester; Shanghai University of Finance and Economics - College of Business

Ming Lu

Shanghai Jiao Tong University (SJTU)

Li Zhang

Sun Yat-Sen University (SYSU)

Date Written: May 25, 2021

Abstract

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

Fang, Min and Han, Libin and Huang, Zibin and Lu, Ming and Zhang, Li, Regional Convergence or Just An Illusion? Place-based Land Policy and Spatial Misallocation (May 25, 2021). Available at SSRN: https://ssrn.com/abstract=3846313 or http://dx.doi.org/10.2139/ssrn.3846313

Min Fang (Contact Author)

HEC Lausanne ( email )

BFSH1
Lausanne, 1015
Switzerland

HOME PAGE: http://www.minfang.info

Geneva Finance Research Institute ( email )

Bd du Pont d'Arve 42
Geneva, Geneva 1211
Switzerland

HOME PAGE: http://www.minfang.info

Libin Han

Dongbei University of Finance and Economics ( email )

China

Zibin Huang

Department of Economics, University of Rochester ( email )

United States

Shanghai University of Finance and Economics - College of Business ( email )

777 Guoding Road
Shanghai, 200433
China

Ming Lu

Shanghai Jiao Tong University (SJTU) ( email )

800 Dongchuan Rd
Minhang, Shanghai 200240
China

Li Zhang

Sun Yat-Sen University (SYSU) ( email )

Guangzhou, Guangdong
China

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