Policy Uncertainty and Investment Goods Price Adjustment: Evidence from China's Land Leasing Market

Abstract

Economic policy uncertainty has prominent effect on investment and output. We constructed a simple model revealing that policy uncertainty reduces the total value of investment via both the quantity adjustment channel and the price adjustment channel. Using unique transaction level land leasing data in China, we distinguish the latter channel from the former. On average, 1% increase in policy uncertainty level reduces the land transaction premium by around 3.91%. The impact of policy uncertainty is more profound for firms with tighter financial constraints and lands located in cities with lower rent-to-price ratio. The influence of policy uncertainty becomes weaker after the anti-corruption campaign in China, especially in provinces scrutinized by the teams of disciplinary inspectors from central government, implying that improvements in political environment alleviates the impact of policy uncertainty.