Government intervention and land misallocation: Evidence from China

- We examined the effects of government intervention on land misallocation and identified its source in China.
- Government intervention in land market does significantly affect land misallocation in China.
- Local governments' revenue and political incentives affect land misallocation.
- Political cycles foster the effects of land price distortion on land misallocation.

Strong government intervention exists in China's land market compared to other countries. This paper examines the effects of government intervention on land misallocation and identifies its source, based on Chinese prefecture-level cities' panel data from 2003 to 2012. The empirical results show that local government's distorted land-leasing price policy, by which it leases out industrial land at a lower price, and leases out commercial and residential land at a higher price, leads to land misallocation between the industrial and service sectors. Local governments' revenue and political incentives also cause land misallocation. More land is leased to the industrial sector when local governments intervene more in land prices and rely more on investments, and when local officials have an incentive to signal performance in the early years of their tenure. The distorted land-leasing policy results from local governments' attracting investments and land-financing incentives, which leads them to lower industrial land prices to attract investments, and to push up commercial and residential land prices in order to pursue revenue. Political cycles foster the effects of land price distortion on land misallocation. Reforms of China's land-leasing system and central-local fiscal institutional arrangements are needed to reshape local governments' land-leasing incentives and remove land price distortion.