Local government land monopoly in China: the influence of residential land price on supply

Abstract

ABSTRACT China’s current land system allows local governments to monopolize land supply, and such monopolist power induces local governments to distort the residential land supply in line with their own interests. This paper uses an overlapping generation model to depict the profit maximization behavior of local governments. The theoretical model suggests that local governments in cities with strong economic conditions would face a lower magnitude of price elasticity of demand and would choose a higher residential land price corresponding to a lower residential land supply to achieve profit maximization. To empirically evaluate the theoretical model, the paper adopts Instrument Variable (IV) estimates and investigates data collected from 142 prefecture-level cities between 2010 and 2020. It suggests there is a negative causal relationship between residential land prices and per capita residential land, thus validating the theoretical model that local governments prioritize profit maximization over meeting the local population’s housing demands.