Land Market Distortion and Insufficient Household Consumption in China

Abstract

The insufficiency of residents’ consumption demand is a major challenge now besetting economic growth in China. Different from previous researches which focus on population structure, precautionary savings, liquidity constraints and consumption habits, this paper places emphasis on the effect of land market distortion on insufficient household consumption in China and its function mechanism. Under the background of monopolistic land supply, land market distortion resulting from the local government monopoly of farmland conversion market and primary city land market, is an important reason for weak household consumption demand. Through constructing land market distortion indicators and using the provincial panel data of China from 2000 to 2014, this paper makes an empirical test and finds that land market distortion has a significantly inhibitory impact on household consumption demand, and higher degree of land market distortion leads to lower household consumption rate. These conclusions are still robust after using instrumental variables to alleviate the possible endogenous problem. Further function mechanism research shows that land market distortion affects household consumption primarily through the channels such as rural-urban income disparity, pushing up housing prices, the reduction in labor income share and the aggravation of local fiscal expenditure structure bias. Its policy implication lies in that land market distortion directly inhibits household consumption, and the advancement of the market-oriented reform of land supply is an efficacious method to increase household consumption.