Place-based Land Policy and Spatial Misallocation

Place-based policies may create spatial misallocation. We investigate a major inland-favoring land policy in China aimed at reducing regional development gaps by allocating more urban land quotas to underdeveloped inland regions. We first show empirical evidence that this policy decreased productivity in more developed eastern areas relative to inland regions. We then build a prefecture-level spatial equilibrium model with migration, land quota constraints, and agglomeration. The model reveals that this policy led to substantial output and productivity losses by distorting both labor and production across regions. Regional output gaps narrowed, but workers from the underdeveloped areas reduced their migration to developed regions and earned less. Counterfactuals suggest that national output would have been 1.8% higher in 2010 if the policy had not been implemented, and workers from underdeveloped areas would have earned 6.3%more income. Instead, regional monetary transfer policies could reduce regional inequality without significantly increasing spatial misallocation. Finally, we demonstrate that eliminating the place-based land quota system yields substantial benefits.