Pro-Manufacturing Land Policies of Competing Local Governments: A Quantitative Analysis of China 

Abstract

We document that local governments in China segment land markets by specifying land use, resulting in significant discounts for manufacturing relative to services and housing, especially in provinces with lower relative productivity in manufacturing. To explore the rationale and welfare implications, we develop a multi-sector quantitative spatial equilibrium model with free entry of firms, where local governments non-cooperatively allocate land to maximize local objectives. We find that maximizing manufacturing output best replicates the observed land discount patterns, particularly the negative relationship between the discounts and relative manufacturing productivity across regions. In contrast, local-welfare-maximizing policies yield a positive relationship but still favor manufacturing, albeit dampened, due to its stronger amplification effect through input-output linkages, with comparative advantage and trade costs influencing policy outcomes. Existing policies lead to significantly lower national welfare compared to a scenario without local government interventions, while local-welfare-maximizing policies achieve outcomes close to the cooperative equilibrium.