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Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market

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  • Panle Jia Barwick
  • Shengmao Cao
  • Shanjun Li

Abstract

This study documents the presence of local protectionism and quantifies its impacts on market competition and social welfare in the context of China's automobile market. A salient feature of China's auto market is that vehicle models by joint ventures and state-owned enterprises command much higher market shares in their headquarter provinces than at the national level. Through county border analysis, falsification tests, and a consumer survey, we uncover protectionist policies such as subsidies to local brands as the primary contributing factor to the observed home bias. We then set up and estimate a market equilibrium model to quantify the impact of local protection, controlling for other demand and supply factors. Counterfactual analysis shows that local protection leads to significant consumer choice distortions and results in 21.9 billion yuan of consumer welfare loss, amounting to 41 percent of total subsidy. Provincial governments face a prisoner's dilemma: local protection reduces aggregate social welfare, but provincial governments have no incentive to unilaterally remove local protection.

Suggested Citation

  • Panle Jia Barwick & Shengmao Cao & Shanjun Li, 2021. "Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market," American Economic Journal: Economic Policy, American Economic Association, vol. 13(4), pages 112-151, November.
  • Handle: RePEc:aea:aejpol:v:13:y:2021:i:4:p:112-51
    DOI: 10.1257/pol.20180513
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    Cited by:

    1. Chen, Shuo & Yan, Xun & Yang, Bo, 2020. "Move to success? Headquarters relocation, political favoritism, and corporate performance," Journal of Corporate Finance, Elsevier, vol. 64(C).
    2. Jie Bai & Jiahua Liu, 2019. "The Impact of Intranational Trade Barriers on Exports: Evidence from a Nationwide VAT Rebate Reform in China," NBER Working Papers 26581, National Bureau of Economic Research, Inc.
    3. Li,Shanjun & Zhu,Xianglei & Ma,Yiding & Zhang,Fan & Zhou,Hui, 2020. "The Role of Government in the Market for Electric Vehicles : Evidence from China," Policy Research Working Paper Series 9359, The World Bank.
    4. Ding, Chengri & Niu, Yi, 2019. "Market size, competition, and firm productivity for manufacturing in China," Regional Science and Urban Economics, Elsevier, vol. 74(C), pages 81-98.

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    More about this item

    JEL classification:

    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • P25 - Economic Systems - - Socialist Systems and Transition Economies - - - Urban, Rural, and Regional Economics
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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