Transaction Mechanism and Industrial Land Allocation Efficiency in China: Evidence from the 2007 Auction Reform

Abstract

Land allocation has played an essential role in China’s industrial development. In the past, most industrial land was transacted through negotiations that usually lacked transparency and competition. Since 2007, the central government has required industrial land to be sold via public auction. This paper studies the land transaction mechanisms operating before and after the 2007 reform and how it has affected allocation efficiency. It analyzes three comprehensive data sets, which contain information on new industrial establishments, land transactions, and nighttime lights. The analysis shows, in sharp contrast to the pre-reform period, more land was allocated to industries that enjoyed a local comparative advantage during the post-reform period; this effect is more pronounced in areas that implemented the reform more stringently. These findings suggest that the reform has facilitated firms to cluster spatially to obtain the benefits associated with agglomeration economies both within and across industries and led to a more efficient geographic distribution of industries. The paper also finds suggestive evidence that the reform has increased local output, which is consistent with the theory.

Keywords: Land transaction mechanism; Industrial land allocation efficiency; Auction reform; Comparative advantage; Spatial distribution of industries; Agglomeration economies

JEL Classification: R1; R52; H7