Do industrial land discounts raise firms' capital-labor ratios? Evidence from China

This study provides micro-level evidence on how declining capital costs reduce labor share, offering novel insights into the role of government land policies. Exploiting a unique institutional feature in China—where industrial land is allocated to firms at prices significantly below those of residential land—we examine the effects of this “industrial land discount” on firms' input choices and factor shares. We find that access to discounted industrial land induces firms to increase capital investment and expand production scale, thereby raising their capital-labor ratios. This effect is not uniform but is concentrated in heavy and capital-intensive sectors, suggesting a policy-induced structural shift. This adjustment operates primarily through capital deepening rather than factor substitution. Moreover, firm selection and industrial agglomeration amplify these effects. While such policies can promote capital accumulation, we find that excessive land discounts distort resource allocation across firms. A greater market orientation in industrial land transactions may help mitigate these inefficiencies and improve resource allocation.