Understanding governance of public land sales: an experiment from Hong Kong

For centuries, many governments in the Asia-Pacific region have owned all the land resources, and government land auctions were deployed as an essential channel to supply public land. While the government-led approach to land supply is often criticized for lacking sensitivity to changing market conditions, experiments have been conducted to remedy this defect by means of a market-led approach that relies on developers to reveal their demand for public land. However, under the market-led approach, public land would not be put on sale until a developer committed an irrevocable bid to initiate a land auction. This market-led mechanism, namely the land application list system (ALS) in Hong Kong, China, has typically created a problem of freeriding among developers and has led to the unintended consequence of an undersupply of land. By considering such land sales reform in Hong Kong, this study uses a simultaneous equation model to demonstrate that the ALS has caused a significant undersupply of land. Moreover, an ordinal generalized linear discrete-choice econometric model is used to confirm that developers are more likely to coordinate with each other in order to internalize freeriding problems. A transaction costs framework is then developed to explain that market- and government-led approaches are not mutually exclusive and should complement each other. A dual approach that integrates both mechanisms is discussed as a new policy option.