Place-based policies, pro-competitive effects, and allocative efficiency: Evidence from China’s economic zones

Using geo-coded firm and administrative data, we examine how China’s economic zones (EZs) impact allocative efficiency by identifying the reduced markups and negative spillover effects that occur after the establishment of EZs. Both incumbents and new entrants contribute to the markup changes. Additional analysis examines the significant role of new firm entry in improving allocative efficiency in EZs. First, the pro-competitive effects in the output market rather than cost savings in the input market primarily account for the reduction in markups of manufacturing firms. Second, the productivity advantages obtained from agglomeration effects may potentially enable firms to decrease their markups by passing the efficiency gains on to customers under competitive pressure. Heterogeneous analysis further indicates that the majority of the reduction in markups is driven by firms with greater market power. Moreover, the degree of pro-competitive effects relies crucially on firm characteristics and market conditions.