Regional Convergence or Just An Illusion? Place-based Land Policy and Spatial Misallocation

We study how place-based land allocation policy can create spatial misallocation. Combining microdata and a spatial equilibrium model, we investigate a major policy change of distributing more land to underdeveloped inland regions in China. First, by a method combining RD and DID, we show causal evidence that this inland-favoring policy increased land prices and decreased firm-level TFP in more developed eastern regions relative to inland regions. Second, we build a spatial equilibrium model featuring worker mobility and floor space constraints on housing and production. The inland-favoring policy is neither fair nor efficient. Counterfactuals reveal that national TFP and urban output would have been 7.3% and 2.4% higher in 2010 if the policy had not been implemented. Moreover, wage and income of workers from underdeveloped regions would have increased by 1% to 2%. The inland-favoring policy seems to reduce regional output gaps, however, it actually hurts workers from underdeveloped regions by hindering their migration to developed regions with high wages while causing aggregate TFP and output losses. We then show that instead of the inland-favoring land policy, a direct regional transfer can increase the income of people from underdeveloped regions without causing substantial efficiency loss