Explaining China’s housing vacancies: A theory based on the incentives of local government officials

Abstract

Why does China have a vast number of unsold and unoccupied homes? This paper proposes a theory based on the incentives of local government officials to explain this puzzle. Specifically, I develop a dynamic, infinite-horizon model that incorporates cities’ economic growth, an evaluation scheme of city managers’ economic performance, as well as city managers’ decision-making of land supply to illustrate the mechanisms. I provide empirical evidence to support the theory and estimate the structural model using manager-city-year level data from 2003 and 2012. Using the parameter estimates from the model, I conduct counterfactual analyses to quantitatively evaluate the impacts of political incentives on the equilibrium land supply. Overall, city managers sell 7.4% more land between 2003 and 2012 relative to the counterfactual in which they have no economic growth incentives. This land oversupply is 12.5% in smaller cities and 3.7% in larger cities. Finally, converting land to housing construction, the estimated impacts explain 23.2% to 27.7% of unsold homes.