Local Governments

  • 详情 The Political Economy of COVID-19 in China
    This research analyses the ramifications of the COVID-19 pandemic on China's economy, examining the divergent epidemic prevention policies used by local governments. Empirical evidence highlights that the emergence of COVID-19 cases correlates with a 1.13% reduction in quarterly GDP growth. However, when a city's secretary maintains an informal ties with the provincial secretary, GDP growth remains resilient. Analyzing micro-level data, we observe that city secretaries with informal ties tend to enact flexible anti-contagion measures. This flexibility stems from a decreased likelihood of reprimand for virus transmission. Such shields exclusively manifests when incumbent provincial secretaries share informal ties with central leadership. This underscores the interplay of political networks in shaping localized economic responses.
  • 详情 Do Anticipated Government Environmental Audits Improve Firm Productivity?Evidence from China
    We investigate the impacts of anticipated government environmental audits (GEAs) on firm productivity. We use a 2009 policy set forth by China’s National Audit Office that required GEAs of local governments as an exogenous event to examine the effect of the policy announcement on firms’ total factor productivity (TFP). Our difference-in-differences tests indicate that TFP in heavily polluting firms improved more than other firms’ TFP after the announcement of the policy. We also find that to raise TFP, firms engage in green invention patents or receive government environmental subsidies. In addition, our cross-sectional analysis suggests that firms in regions where governments have strong environmental enforcement or that are in the eastern regions of China increase TFP more.
  • 详情 Local Government Debt and Corporate Labor Decisions: Evidence From China
    From the perspective of corporate labor employment, we examine whether debt pressure on local governments prompts them to shift part of their social responsibilities to local firms. We conduct an analysis on Chinese local government debt (LGD) data and find that when LGD is higher, local firms are less likely to cut labor costs when their sales decrease, indicating greater labor cost stickiness. We attribute this to the responsibility-shifting effect, i.e., with heavier debt burdens, local governments intervene more in corporate labor decisions by restricting employee layoffs. Consistent with this argument, we find that the effect of LGD on labor cost stickiness is more pronounced for state-owned and politically connected firms; in regions with lower marketization levels and government fiscal self-sufficient capacities; and when regional unemployment rates, macroeconomic uncertainty, and political risk are higher. We show that through responsibilityshiftingamid high LGD, local governments benefit from a reduction in social expenditures. However, firms with stickier current labor costs will have lower subsequent productivity and market value, despite local governments reciprocating with more subsidies. Overall, LGD not only adversely impacts firm financing through the crowding-out effect but also erodes firm value through the responsibility-shifting effect.
  • 详情 Expropriation Risk and Investment: A Natural Experiment
    This paper uses the enactment of China’s 2007 Property Law (the Law), which reduces the risk of expropriation by local governments, as the setting to investigate the importance of property rights protection for private firm investment. Using propensity score matching and a difference-in-differences design, we find that firms facing weaker property rights protection prior to the Law significantly increase their investment and investment efficiency after the Law. Cross-sectional analyses document evidence consistent with a decrease in firms’ perceived expropriation risk as the main mechanism underlying the Law’s effect. Finally, we show that the Law improves local economic outcomes and employment.
  • 详情 State-owned Enterprises and Labor Unrest: Evidence from China
    Using an extensive panel of Chinese firms from the Annual Tax Survey and relying on labor unrest as shock to local social stability, we show that state-owned enterprises (SOEs) react to nearby labor unrest by creating additional employment at the expense of firm performance. Each SOE exposed to unrest hires 3% more employees, which is a sizeable aggregated effect. This effect is larger when labor unrest occurs in the same industry as the exposed SOEs, when local governments have sound fiscal budgets, and when governing mayors have stronger promotion incentives. SOEs obtain more fiscal benefits when they absorb additional labor. In contrast, non-SOEs do not react to labor unrest, and their performance is unaffected. Similar effects are detected when we use the population of Chinese listed firms. This paper provides evidence that SOEs internalize the goal of maintaining social stability and contribute to the growth of the non-state sector.
  • 详情 Why China's Housing Policies Have Failed
    This paper reviews the current housing crisis in China and explores the roles of supply-demand imbalances and local governments in the real estate sector. To prevent the housing downturn from further dragging down economic growth, Beijing suspended the financing restrictions on developers imposed in August 2020. These restrictions, known as the “three red lines” that limited new borrowing by developers, led Chinese property developers to default on a record number of debt obligations and triggered the most serious housing slump China has seen since 1998. The property sector saw its value added decline by more than 5 percent in 2022, even as the overall economy grew at 3 percent. But the current dynamics in the housing market reflect a repeated pattern: Loosening financing restrictions on developers and using housing as a macroeconomic stabilization tool risks reinforcing the boom-bust housing cycle. China’s real estate sector is a systemic problem. Without serious reforms to address concerns such as supply-demand imbalances and local governments’ deep connections with real estate, housing slumps like the one in 2022 may recur.
  • 详情 Government Deleveraging and Corporate Distress
    We show that government deleveraging causes corporate distress in a distorted financial market. Our difference-in-differences analysis exploits China’s top-down deleveraging policy in 2017, which reduces local governments’ borrowing capacity through shadow bank financing. Private firms with government procurement contracts experience larger accounts receivable increases, larger cash holdings reductions, and higher external financing costs. These firms also experienced greater likelihoods of ownership changes and deteriorated performance. Effects are muted for state-owned enterprises, which enjoy funding privileges in China’s financial system. Our paper thus reveals a novel channel of allocation inefficiencies where government deleveraging amplifies adverse impacts of financial distortions.
  • 详情 Value of Qualification to Buy a House: Evidence from the Housing Purchase Restriction Policy in China
    China’s housing purchase restriction (HPR) policy imposes administrative restrictions on households’ home purchase eligibility to curb speculative demand. We quantify households’ willingness to pay (WTP) to re-acquire such eligibility. The empirical results based on the staggered DID specification suggest that when local governments implement the HPR policy, the transaction prices of judicial housing auctions legally exempted from HPR increase by 18.91%. This HPR-exempted qualification premium can be converted to an estimate of 22.48% of the transaction price as buyers’ WTP for home purchase eligibility. The heterogeneity analysis also suggests that the WTP significantly increases when speculative incentives are stronger in the housing market. If policymakers in mainland China consider replacing the HPR policy with an additional buyer transaction tax like that in Singapore and Hong Kong, China, the WTP estimates can serve as the benchmark in setting the tax rate.
  • 详情 Is There an Industrial Land Discount in China? A Public Finance Perspective
    China’s land market features a substantial industrial discount: industrial-zoned land is an order of magnitude cheaper than residential land. In contrast to explanations centered on subsidies to industry, we find that a primary determinant of this price gap is local public finance. Under the "land finance" system, land sales are an important source of revenues for Chinese local governments. We show that local governments, who serve as monopolistic land sellers in China, face a trade-off between supplying residential or industrial land that is determined by the different time profiles of revenues from industrial and residential land sales, local governments’ financial constraints, and the extent of local governments’ tax revenue sharing with other levels of government.
  • 详情 Centralization of Environmental Administration and Air Pollution: Evidence from China
    This paper studies how centralizing environmental administration affected air pollution in China. China launched a vertical administration reform in 2016 to empower upper-level Environmental Protection Bureaus to administer lower-level bureaus vertically through personnel control. Exploiting a stacked difference-in-differences strategy and a regression discontinuity design, we find that the verticalization reform significantly reduced air pollution. The effect was stronger in places where air pollution is less likely to be affected by spillovers from other provinces or where local governments paid less attention to environmental protection before the reform. Additionally, we find that the reform significantly increased the intensity of inspection by local agencies and environmental investments by heavily polluting firms.