How Does Land Policy Affect the Size Distribution of Chinese Cities?

Abstract

This paper studies the evolution of city population and the land use policy in China. We show that the population distribution of cities in China tends to cluster around 2-8 million people, and the distribution has become more clustered in recent years. Using a general equilibrium urban model, we derive a link between the salient data features and the unique institutional settings in China, including (i) the financing of public goods through land revenue and (ii) the discretion of regional governments over land allocation under constraints from the central government. Theoretically, we show that the first institutional feature causes higher elasticity in city population growth with respect to land supply. The empirical results reveal that commercial land in China has a significant positive impact on population, and the impact is amplified by the agglomeration effect. Residential land, on the other hand, has a negative effect on population in cities with stronger agglomeration. We also provide evidence that, in the absence of land allocation constraints from the central government, regional governments would allocate more land to commercial use and thus population would grow faster in larger cities.