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Why is local governments’ land supply curve vertical in Public Land Ownership Regime? A Theoretical analysis and an empirical investigation of Chine

Time:2017-03-06 08:26:07  Hits:[]

This paper examines the land supply function of local governments with a limited term of office. We first introduce the local governments into an urban economics model, based on Saiz (2010), and prove that, when their term of office is limited, they will choose a vertical land supply curve than otherwise. The pressure of land demand will then continue to increase land prices. With a stable volume of land supply markets, this case will result in soaring land prices and an increasing land leasing income. The logic behind this phenomenon is that the positive land price substitution effect and negative income elasticity effect will exactly offset each other and make the local governments land supply curve vertical when the government term in office is fixed. In order to confirm this theoretical assertion, we use a sample of panel data with 285 Chinese cities from 2003 to 2011 and demonstrate that the land price substitution effect and the income effect exactly offset each other, implying that the land supply curve is vertical.
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