How does land subsidy policy affect economic performance? Theory and evidence from China

The causes and consequences of governments' land subsidy policy aiming for promoting industry development have been little studied. We measure the degree of industrial land subsidy from the spatial perspective by the price ratio of neighbouring commercial and residential land to the industrial land which firm purchased from local governments. By merging data of Chinese listed firms with land transaction data over 2007-2017, we find that industrial land subsidy is related to political connection and governments' selective industry policy. We also find that industrial firms received land subsidies have lower productivity and profitability. Our results indicate the inefficiency of industrial land subsidy policy. We interpret these findings as evidence of the resource curse of subsidies, where the industrial land subsidy policy benefits firms at the expense of efficiency. Policy of reshaping the incentives of local governments is recommended to correct the distortion of land subsidy policy.