Government-directed urban growth, firm entry, and industrial land prices in Chinese cities

Abstract We examine the effects of a large-scale administrative reorganization in China, where counties are annexed into cities to accommodate urban spatial expansion. We present a simple model to illustrate how this government-directed urban growth via annexation may affect firm entry decisions and in turn land market outcomes. The key idea is that annexation indicates the direction of future urban expansion and helps coordinate expectation. Using nationwide data on land-lease transactions, we find that annexation raises industrial land prices in the annexed counties by 7% but does not reduce land prices in neighboring counties and central cities. We show that the annexed counties experienced increases in firm entry and investment, offering a plausible mechanism for the effect on industrial land prices.