Doing well by doing good? The case of housing construction quality in China

•We investigate whether developers have incentives to promote construction quality.•Using related award as indicator of excellent performance in construction quality.•Price premium of awarded units significantly exists in the resale market.•But outstanding construction quality is not capitalized at the presale stage.•More government efforts are called for to correct such market failure.

Construction quality is a major problem in China's housing market. We investigate whether the housing market could provide incentives to encourage developers to promote construction quality beyond the compulsory, minimum standards by testing the financial viability of efforts made in this field by developers. This study takes place in the city of Beijing, where the “Great Wall Award”, granted by the local construction bureau, is used as an indicator of excellent performance in construction quality. Our analysis shows that, from 2005 to 2010, the transaction price in the housing resale market of a unit that received the award can be up to 7.0% higher than a similar unit that did not receive the award. This difference is due to both the higher possible rent and a lower capitalization rate. However, we find no meaningful price premium at the presale stage, while developers with a record of winning the award cannot use such reputation to obtain price premiums in later projects either. These findings indicate a mismatch between the costs and benefits that residential developers face when deciding to enhance the quality of their construction. This mismatch partially explains the current housing construction quality problems in China, and may also discourage future improvements in this field. More efforts from the government are required to correct such market failures.