Residential Housing Investment and Local Corruption: Evidence from the Chinese Housing Market

Abstract

We develop a stylized model to explore the relationship between local corruption and over-investment in residential housing sector. The model has four predictions: i) higher corruption increases investment in the residential housing sector, ii) higher corruption decreases investment in the non-housing sector; iii) there is a threshold effect of corruption on the residential housing over-investment. Corruption causes and aggravates the over-investment problem only when the corruption is high enough; and iv) city attractiveness can negate the effect of corruption on housing over-investment. We test these predictions using a newly developed prefecture city-level corruption dataset and find strong empirical support for all four hypotheses.

Keywords: Corruption, Residential Housing Investment, Chinese Construction Industry