Incentives behind local governments' industrial land transfers: evidence from China

Many countries have embraced fiscal decentralization to incentivize subnational units to develop local economies. However, central governments in unitary regimes often delegate spending responsibilities generously but hesitate to devolve revenues. Few studies have explored the incentives driving local government behaviors under incomplete fiscal decentralization. This paper fills this gap by studying industrial land transfers by local governments in China. We construct a theoretical model to clarify the essential role of industrial land supply in local government revenue. Then we test hypotheses using the county-level dataset from the Yangtze River Delta spanning 2012 to 2019. We find that (i) a widening gap between industrial and nonindustrial land prices promotes county-level governments to reduce industrial land supply; (ii) they increase industrial land supply when receiving a larger budget shares; and (iii) political promotion incentive has insignificant effects on industrial land transfers. These results are robust across various checks. Heterogeneity analysis indicates stronger incentive effects of land price gaps and budget distribution in urban districts compared to normal counties and county-level cities. Further analysis suggests that county-level governments leverage industrial land transfers to boost nonindustrial land sales and industrial economic production. The boosting effects on nonindustrial land sales are immediate but short-lived, while the effects on industrial economic production show an enhancing trend over time. These findings suggest that allocating more government budgets to the local level encourages subnational units to adopt longer-term policies in developing local economies. This study sheds insights into the design of incentives for local governments under unitary regimes.