Government Behavior on Urban Land Supply: Does it Follow a Prospect Preference?

Abstract

This paper investigates the role of the prospect theory preferences in influencing the relationship between performance goals and subsequent performances. We find an inverted-U relationship between the goal of the central government and the performance of local governments in land supply based on China’s land supply data between 2005 and 2013. The higher land supply goals of the central government initially increase and then decrease the land supply by local governments. We further explore the inverted-U relations by considering local governments’ prospect theory preferences theoretically and empirically. Our findings indicate that local governments are goal-dependent and risk-seeking in face of the extraordinarily ambitious goals set by the central government.