Option effect of land transfer by city governments: a case study of Hangzhou

Purpose - This paper aims to study the impact of land options on the land transfer behaviour of Chinese city governments. Design/methodology/approach - Based on the institutional environment of Hangzhou, China, the option pricing model is used to measure the option value of the trading plots. The effect of the option value on the land transfer price and the timing of transfers are estimated respectively, using the hedonic price model and the survival analysis models. Findings - The results show that the option value has a significant explanation on land price and timing of land transfers. Under the effect of option value, the positive impact of fiscal pressure on the possibility of land transfer weakens. From the perspective of the annual option premium rate, the option premium is closely related to the real estate cycle. Option premiums are higher during booms but lower during recessions and in new urban areas. Practical implications - By revealing the distinction of land option premiums in different places and times, this paper provides a reference for city governments seeking a balance between real estate regulation and obtaining more land revenue. Originality/value - By introducing policy variables that reflect the degree of tightness of real estate regulation and indicators of local government financial pressure, the paper discusses the impact of options on the transfer behaviour of local governments in different situations.