Land financing and economic growth: Evidence from Chinese counties

Abstract

How does land institution affect economic growth? This paper proposes a simple model showing that, in an institution that land is owned and supplied by the state, local governments tend to increase investment in infrastructure when holding a larger share of land conveyance revenue in the total revenue. The main channel is that land conveyance revenue serves as a signal of credit quality of local governments. To test the model of land financing, this paper employs an exogenous event of the deregulation of local government debt in China in 2009. Using county-level data in China, empirical results suggest that counties with a higher initial share of land conveyance revenue were growing faster after 2009. The land-financing effect was persistent and even stronger during 2009 to 2014. Results are robust using geographic plainness as the instrumental variable measuring the amount of developable land resources. There is also consistent evidence on the growth of night light intensity.