Place-Based Land Policy and Spatial Misallocation: Theory and Evidence From China

Abstract

We investigate a land policy in China that allocated more urban land quotas to underdeveloped regions to reduce regional gaps. Empirically, the policy decreased productivity in eastern areas relative to the inland. A spatial equilibrium model with migration, land quota constraints, and agglomeration shows the policy distorts labor and production across regions, causing substantial output losses. Though regional gaps narrowed, workers from underdeveloped areas migrated less and earned less. Without the policy, national output would have been 1.8% higher, and workers in underdeveloped areas would have earned 1.6% more in 2010. Regional transfers offer a less distortionary alternative for reducing inequality.