Decentralization of land leasing under a politically centralized regime : interplays between political promotion, rent-seeking and local government behaviors in China

Abstract

In China, urban land management is decentralized. Local governments have the statutory authority to sell land-use rights and retain the proceeds. However, instead of maximizing revenue by selling all land parcels through market-based approaches, i.e., tender, auction, or listing, some local governments use nonmarket-based negotiations to lease significant portions of the land they control. Even in residential land auctions, which are generally highly competitive, it is not unusual for transactions to be at the asking price. Although several studies have investigated this issue, few systematically analyze this phenomenon. Thus, this thesis investigates the reasons underlying this phenomenon and explores remedies, premised on the political economy of decentralization. The first study explores the key factors that drive local governments to sell land via nonmarket negotiations. China’s political system is centralized, and the promotion of local officials is determined according to their economic achievements. To spur long-term economic growth, local leaders often lease land at below-market rates through nonmarket negotiations to attract mobile capital. However, they also transfer land via market-based channels to maximize one-off land sale income and expand fiscal revenue. Assuming that local political leaders aim to maximize their promotion prospects, my theoretical model predicts that the ratio of land parcels transferred via market-based approaches first decreases and then increases with local leaders’ tenure in office. The empirical results using panel data from 240 cities affirm this U-shaped correlation for the 2002–2013 period, when economic growth was the overwhelming indicator of political performance. The second study examines the factors that prompt local government officials to limit the competition in residential land auctions. Residential real estate investment is location-specific and less mobile than industrial investment, which undermines the disciplinary effect of interregional competition on corruption. The analysis of the 2010–2016 residential land auction records of 15 major cities shows that local governments manipulate the competition in land auctions to allow local developers to obtain land at a discount. The empirical results of the difference-in-differences approach reveal that inspection visits by the Central Inspection Teams (CIT) of the Central Commission for Discipline Inspection (CCDI), as part of Xi’s anticorruption campaign, increase the price paid by local developers from 15.49% to 19.01% relative to that paid by other developers in noncompetitive auctions. However, CCDI inspections have no such effect on competitive auctions. These empirical findings suggest that the amendment of the cadre assessment system has altered local leaders’ objective function and mitigated the strategic use of negotiations in land leasing. Additionally, CCDI inspections have reinforced central scrutiny of subnational governments and recentralized administrative discretion, inhibiting rent-seeking practices at the local level. Both of these findings underscore the importance of the central government in addressing the problems associated with decentralization. Nevertheless, central control should be executed with caution to preserve the merits of federalism. To avoid a reversal of decentralization, the institutionalization of economic decentralization in China should be high on the central government’s agenda.