Place-based policies, financial friction, and city size: Evidence from China’s institutional opening-up

Abstract

This paper investigates the impact of place-based economic policies on urban growth trajectories, focusing on the Institutional Opening-up (IOP) policy implemented through Pilot Free Trade Zones since 2013. Using a multi-period difference-in-differences approach, we find that IOP significantly increases city size, evidenced by an 8.87 % growth in the resident population of the treated cities. To explore the mechanisms underlying this expansion, we develop a spatial general equilibrium model incorporating a financial intermediation sector. The model posits that both innovation enhancement and the alleviation of financial frictions play significant roles in driving urban growth, with these insights corroborated by empirical analysis at both the city and firm levels. However, the policy also exacerbates urban growth imbalances. While cities within 100 km of treated zones experience positive spillover effects, those within the 100–300 km range suffer significant siphoning effects. Migration survey data at the individual level suggests that these siphoning effects occur as treated cities attract labor from more distant areas while simultaneously reinforcing the settlement intentions of migrants.