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

69 Pages Posted: 10 Feb 2022 Last revised: 24 Feb 2024

See all articles by Zhiguo He

Zhiguo He

Stanford University - Knight Management Center

Scott Nelson

University of Chicago - Booth School of Business

Yang Su

CUHK Business School

Anthony Lee Zhang

University of Chicago - Booth School of Business

Fudong Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2023

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

Suggested Citation

He, Zhiguo and Nelson, Scott and Su, Yang and Zhang, Anthony Lee and Zhang, Fudong, Zoning for Profits: How Public Finance Shapes Land Supply in China (December 1, 2023). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-24, Available at SSRN: https://ssrn.com/abstract=4030799 or http://dx.doi.org/10.2139/ssrn.4030799

Zhiguo He (Contact Author)

Stanford University - Knight Management Center ( email )

655 Knight Way
Stanford, CA 94305-7298
United States

Scott Nelson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Yang Su

CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Anthony Lee Zhang

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Fudong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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