Hierarchical reform, political connection and land transfer

This paper examines how China's Incorporation of Counties into Prefectures (ICP) reform reshapes the relationship between firms' political connections and land transfer prices. Using land transaction records and manually collected political-connection information for both listed and unlisted firms in the Sichuan-Chongqing urban agglomeration from 2007 to 2020, we document a sizeable “political discount” in land prices: politically connected firms acquire industrial and commercial land at significantly lower prices than otherwise comparable firms. Crucially, this discount is materially compressed after counties are incorporated into prefecture-level cities. The moderating effect is stronger in locations facing tighter fiscal conditions—greater fiscal pressure, heavier reliance on land-based revenues, and higher living costs—suggesting that local incentives and constraints shape how effectively the reform disciplines preferential treatment. We further show that the attenuation is more pronounced for non-local political ties and firms operating in lower–social-capital environments. Mechanism evidence indicates that ICP weakens the land-price advantage associated with political connections by strengthening market forces through intensified local entry and by tightening oversight through stronger audit enforcement. Overall, the findings highlight how hierarchical governance reforms can mitigate land-price distortions associated with political connections and improve allocative efficiency in factor markets.