Land price control and employee wages: A bunching analysis of factor cost transfer

Abstract

AbstractTo prevent local governments from transferring industrial land at low prices to attract investment, the central government of China enacted a land price control policy that stipulates a minimum price for land transfers. Using a sample of 235,803 land transactions in China from 2008 to 2015, we estimate the effects of this policy on local governments and companies. First, we find that local governments abide by the policy to some extent. However, owing to the constraints of local economic performance, there is a degree of motivation not to apply the policy, which is manifested in selective law enforcement. Second, for some companies, the policy pushes the land purchase cost above the minimum price, and the distribution of land costs across the sample shows a bunching effect in certain neighborhoods. Third, companies with rising land costs have a significant incentive to pass on their increased costs, which is manifested in a significant decline in their expenditure on employee wages, particularly in companies with poor liquidity ratios. However, there is no evidence that the increase in land costs has an impact on other company behaviors, such as investment or tax compliance.