Public Land Leasing and the Changing Roles of Local Government in Urban China

Abstract

Since late 1980s China's urban land use began to change from administrative allocation to public land leasing. Compared to existing studies that focus more on the land market, this paper tries to provide another perspective on public land leasing that links urban institutions, land use, rent and wage capitalization, and local public finance. My focus is on the endogenous evolution of local public finance due to rent capitalization, especially how local public finance in China transits from planned economy to market economy and how this is related to urban land reform. The model is based on the assumptions of fiscal decentralization and growth of private economy. Especially, the model assumes an urban economy with two segregated sectors and a local government that allocates its effort to maximize fiscal revenue. The local government has multiple roles: The owner of state-owned-enterprises (SOEs), the owner of urban land, and the provider of local public goods. The findings indicate that complete wage capitalization under administrative allocation of land contributes to the pressure on local governments to look for alternative revenue source. Public land leasing helps to include the private sector into local public finance and re-orient local governments' interest from SOEs to public goods provision. A simple test on the institutional change shows the efficiency of public land leasing relative to the old system. Discussions on some related issues are also included.