Working Paper: CEPR ID: DP15247
Authors: Vernon Henderson; Qinghua Zhang; Siqi Zheng; Dongling Su
Abstract: Despite China’s economic achievements, factor market reforms have been slow. We analyze local political manipulation of land markets, along with capital market favoritism of certain cities, using a structural general equilibrium model. We estimate city-by-city local leaders’ preferences over GDP enhancement versus residents’ welfare. Equalizing capital prices across cities would increase worker welfare and returns to capital by 2.6% and 11%, respectively. Further, forcing local leader to focus just on enhancing welfare of residents would increase welfare by another 5.3%. Reforms would significantly reduce the population of favored cities like Tianjin and Beijing, while raising that of cities like Shenzhen.
Keywords: Political Economy; China; Factor Markets
JEL Codes: N50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| equalizing capital prices across cities (G19) | increase in worker welfare (J38) |
| equalizing capital prices across cities (G19) | increase in returns to capital (D33) |
| local leaders prioritizing residents' welfare (R50) | rise in consumer welfare (D19) |
| political manipulation (D72) | welfare outcomes for residents (I39) |
| changing local leaders' priorities (D73) | resource allocation (H61) |
| changing local leaders' priorities (D73) | population dynamics (J11) |