Market-oriented reform and land use efficiency: Evidence from a regression discontinuity design

This paper explores the causal effect of market-oriented reform on land use efficiency, by taking a fuzzy regression discontinuity (RD) design based on China’s land market reform. The reform in this paper refers to the event that the central government strictly directed city governments to choose market-oriented methods in transferring industrial land since July 1, 2007. Such an institutional background leads to a discontinuity where the probability of land transferred through market-oriented methods significantly jumped up after July 1. The RD results show that market does have a positive impact on land use efficiency, which is indicated by the shortened land development period, relaxing of the constraint on floor area ratio, and superior companies being screened out to become land buyers. These effects are not only statistically significant and economically sizable, but also keep robust facing multiple changes of bandwidth, alternate of the database, and deletion of special samples. However, we also find the positive effect of market is conditional on government-enterprise relationships. If we compare land whose buyers are companies with a close relationship with governments, market will neither increase the intensity of land use nor make superior companies stand out. This paper contributes to the literature on the efficiency of market for two aspects: (1) by using a novel RD design we identify the causal effect of market-oriented reform on land use efficiency; (2) by uncovering the conditional effect of market we prove the limitation of market in a transitional economy, where other factors like networks, political forces still play an important role.