Incentives behind local governments' industrial land transfers: evidence from China

Abstract

<p>Many countries have embraced fiscal decentralization to develop local economies. However, central governments in unitary regimes often delegate spending responsibilities without fully devolving revenues. Few studies have explored the incentives driving local government strategies under incomplete fiscal decentralization. This paper fills this gap by studying industrial land transfers by local governments in China. We construct a theoretical model to clarify the essential role of industrial land supply in local economic development. Then we test hypotheses using the county-level dataset from the Yangtze River Delta spanning 2012 to 2019. We find that (i) a widening gap between industrial and nonindustrial land prices forms the market incentive, promoting county-level governments to reduce industrial land supply; (ii) greater budget shares can serve as the fiscal incentive, directing them to increase industrial land supply; and (iii) the political incentive stemming from promotion tournament has insignificant effects on industrial land transfers. These results hold across various robustness checks. Heterogeneity analysis indicates stronger incentive effects of land price gaps and budget distribution in urban districts compared to normal counties and county-level cities. Further analysis shows that county-level governments leverage industrial land transfers to boost nonindustrial land sales and industrial economic production. The impact on nonindustrial land sales is immediate but short-lived, while the effect on industrial economic production strengthens over time. These findings suggest that allocating more government budgets to local units encourages them to adopt longer-sighted policies in local development. This study sheds insights into the design of incentives for local governments under unitary regimes.</p>