Zoning for Profits: How Public Finance Shapes Land Supply in China

Abstract

Public finance and real estate are intertwined in China, where local governments are monopolistic land suppliers. We study how tax benefits associated with land zoning, in addition to the direct land sale prices, are essential for understanding local governments’ land allocation decisions. First, we show that the large (10-fold) price premium for residential-zoned relative to industrial-zoned land can be explained by their future tax difference: industrial- and residential-zoned land generate similar long-run pecuniary benefits once their tax benefits are taken into account. Second, we find suggestive evidence that tax incentives do shape local governments’ land zoning: industrial land supply increases with local governments’ industrial tax share and decreases with their cost of capital.

Keywords: Municipal Finance, Land Zoning, Municipal Corporate Bonds, Tax Sharing, Housing Markets

JEL Classification: H70, G31, R14, R38