Place-based policies, administrative hierarchy, and city growth: Evidence from China*

Place-based policies often lead to unintended heterogeneous effects due to ignored constraints. Political hierarchy is one of these constraints whose effects on policy performance have rarely been examined. By employing data of prefecture-level cities in western China from 1995 to 2007, we assess the impacts of China's Great Western Development program on the growth divergence between cities with high and low administrative hierarchies. The empirical results show that the annual per capita GDP growth of high-level cities was 1.26 percent higher than that of ordinary prefecture-level cities after implementing the policy in 2000. Due to their high political status, the high-level cities experienced an increase in population, investment, and transfer payments after the policy, which were mostly siphoned from surrounding low-level cities. This caused a decline in the total factor productivity and increased resource misallocation. These findings suggest that place-based policies should consider imbalance effects under political hierarchy.