Inter-Regional Barriers, Market Integration, and Economic Growth: Evidence from China

Abstract

This paper studies the impact of a policy reform in China that removed inter-regional market frictions by incorporating counties into prefectures with a larger market. Using a difference-in-differences approach, we compare incorporated counties, both before and after the reform, to two novel control groups: counties that applied for incorporation but failed and counties that would be incorporated several years later. We find that the reform immediately and persistently increased the economic growth of incorporated counties. Several sources of evidence suggest that treated counties experienced relatively rapid growth because they became more integrated into the domestic market.