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How do career incentives affect a city leader’s decision on urban spatial expansion?

April 14, 2022

Research Background

China has experienced striking urban growth: from 1990 to 2015, its urban population grew from 302 million to 771 million and real urban GDP increased at an annual rate of 10%.[1]

Along with this massive urban growth, the cities have undergone substantial spatial expansion. While increasing city size can bring about higher productivity (Duranton and Puga, 2014), it also leads to longer commuting times and traffic jams (Newman and Kenworthy, 1999; Kahn, 2000; Harari, 2018). Furthermore, urban spatial expansion causes pollution and potential damage to the ecosystem (Glaeser and Kahn, 2004; Zheng and Kahn, 2013).

Rural-to-urban land conversion in China has been notoriously characterized by under-compensation of peasants who lost their agricultural land to urban expansion (Feng, Lichtenberg, and Ding, 2015). Such under-compensation incentivizes cities to sprawl rather than undertaking brownfield redevelopment.

Given that the advancement of a city leader depends on the city’s economic performance, city leaders puts certain positive weight on that performance (e.g., total output) in his objective function. This weight increases and overshadows his concern for welfare as his career-incentive intensity increases, which may cause distortion. One strategy that is frequently used to enhance economic performance is to raise fiscal revenues to finance public infrastructure. Taking land at the city edge is a key financing mechanism since it generates land sale revenues for the city treasury and the compensation fee for farm land is very low while the demolition fee for brownfield redevelopment is very high (World Bank and DRCSC, 2014).

However, there is a tradeoff for city leaders. Outward expansion generates social costs (e.g., pollution, lengthy commuting, etc.) and hurts social welfare, which also has a positive weight in the city leader’s objective function. Moreover, the upper-level governments impose quota restrictions on urban land expansion in order to prohibit the loss of arable land and to maintain food security. Thus, city leaders have to expend costly efforts, such as devising creative rationales for extra quotas and networking with upper-level government officials, to lobby for permission to exceed typical expansion allowances (Xie, 2015).

This paper studies the effect of city leaders’ career-incentive intensities on urban spatial expansion under China’s unique institutional background. Our analysis is motivated by two important institutional features of China’s urban planning and development. First, China’s city leaders, who hold critical control over local economic activities, play a central role in planning urban land development. Second, these leaders are placed in tournaments in which their promotions are evaluated by upper-level governments and closely linked with local economic outcomes such as total output and fiscal revenues (e.g., Li and Zhou, 2005). The root cause of these two institutional features lies in China’s intergovernmental governance structure, which combines a regionally decentralized economic system with a politically centralized hierarchy (Xu, 2011).

Literature Review

Our paper contributes to the existing literature by providing an original political economy story about China’s urban spatial expansion. To the best of our knowledge, this paper is the first to show how local politicians under an authoritarian regime play a central role in shaping urban spatial expansion. Furthermore, we investigate the welfare implications of such career-incentivedriven outward expansion. Our paper thus enriches the urban sprawl literature (e.g., Brueckner and Fansler, 1983; Glaeser and Kahn, 2004; McGrath, 2005; Burchfield et al., 2006), as well as the literature on land use policies and regulations, for which most current research is set in the context of democratic countries (Gyourko and Molloy, 2015). [2]

Moreover, our study contributes to a large strand of literature on the incentives of Chinese local leaders and their impacts on economic development. While some studies emphasize the role of fiscal incentives (e.g., Qian and Weignast, 1997), others focus on promotion incentives (e.g., Li and Zhou, 2005; Xu, 2011). Our study extends this line of literature by linking local leaders’ career incentives to the spatial expansion of urban land development, which is arguably one of the major growth engines of Chinese cities (Henderson, 2005).

There is a small but growing body of recent literature on land development and regulations in urban China (Deng et al., 2008; Lichtenberg and Ding, 2009; Han and Kung, 2015; Brueckner et al., 2017; Cai, Wang, and Zhang, 2017). Unlike these studies, we explicitly model and empirically test the role of city leaders’ career incentives in driving the outward expansion of city boundaries and its welfare implications. In addition, the urban land development of Chinese cities has involved pervasive rent-seeking and corruption, as is well documented in the literature (Cai, Henderson, and Zhang, 2013; Cai et al., 2017). However, we argue that the empirical findings in this paper are unlikely to be driven by the rent-seeking and corruption motives of local leaders.

Research Method

This paper first develops a model that captures the driving forces of urban outward expansion as discussed above. Our model predicts that the higher the career-incentive intensity of city leaders is, the more urban outward expansion occurs, which leads to higher output and larger population. Furthermore, city leaders with sufficiently strong career incentives tend to expand their cities outward beyond the socially optimal level and this excessive expansion is detrimental to social welfare. We then test the key predictions of our model utilizing a large database of over 30,000 completed residential land transactions in 200 Chinese cities from 2000 through 2011.

Our empirical analyses focus on the relationship between city leaders’ career incentives and the spatial pattern of urban land development. A city leader’s ex-ante promotion likelihood can be estimated by his age and political hierarchy level when he takes office, independent of his ex-post performance. We construct a measure of outward expansion based on the top percentiles (e.g., 90%) in the distribution of the distances to the city center of all the land parcels sold during each leader's term of office.

Research Findings

Our theoretical model predicts that city leaders with higher career incentives tend to expand the urban spatial size further outward, generating higher output and population. When the incentives are strong enough, there will be excessive outward expansion at the expense of social welfare. Exploiting a large micro-level land dataset that features rich variations across cities and over time, we put the model to empirical tests and find results fairly consistent with the theory.

However, while we have found empirical evidence that local leaders’ career incentives are positively related to cities’ total industrial output and population, empirically testing whether career incentives lead to excessive expansion is challenging. This is because ideally, “excessive” outward expansion should be measured as total outward expansion minus the benchmark outward expansion that is socially optimal or is permitted by the original land quota. Unfortunately, we can observe neither the socially optimal level nor the land quota data for each city.

Due to data limitations, we are unable to perform a comprehensive welfare assessment. We thus regard our empirical results concerning welfare as suggestive evidence.

Future Developments

This paper creates possibilities for future research in several directions.

For instance, it is worth further studying how the pattern of urban land development influences the spatial distribution of economic activities within cities. Baum-Snow et al. (2017) find that road infrastructure facilitates the decentralization of population and manufacturing production in Chinese cities. It would be interesting to examine how urban land development directed by city governments affects the provision of public infrastructure, and how this in turn shapes the internal urban structure in terms of the locations of firms, employment and population.

It would also be worth investigating how residential land developments complement industrial land developments in boosting local output and how land developments enhance the formation of edge cities in suburban areas. A recent study shows that as large numbers of firms cluster in industrial parks at the city edge, they can enjoy localization economy benefits and workers can also live in nearby residential developments (Zheng et al., 2017). This implies that the downsides of the outward expansion that we have described may be mitigated by the creation of industrial parks at the edges of many cities.

About the Author

Li-An Zhou is a Professor of Applied Economics at Guanghua. Dr. Zhou received his BA and MA in economics from Peking University, and his Ph.D. in economics from Stanford University. He joined Guanghua as an Assistant Professor in 2002 and became a full Professor in 2010. His research interests include political economy, industrial organization, economic development, and Chinese economy. Dr. Zhou has published papers in leading journals in economics and management, includingAmerican Economic Review, Review of Economics and Statistics, RAND Journal of Economics, Journal of Public Economics, Economic Journal, and Strategic Management Journal. He is also the author of the bookIncentives and Governance: China's Local Governments(Cengage Learning, 2010).

Dr. Qinghua Zhang is now Professor at the Department of Applied Economics in Guanghua School of Management, Peking University. She graduated from Wuhan University where she received her bachelor's degree in economics. She received her Ph.D in economics from Brown University. She was visiting scholar at the London School of Economics and Political Science during 2015-2016, and the Department of Economics in University of Texas at Austin between 2002 and 2004. She was also short-term consultant for the World Bank in 2017, 2006, 2005 and 2004.

[1]The calculations are based on China Statistical Yearbooks of various years.

[2]Regarding the political economy of urban land development in democratic countries, one strand of literature emphasizes that homeowners who care about their own home values are likely to support stricter land use regulations (e.g., Brueckner, 1995; Glaeser, Gyourko, and Saks, 2005; Hilber and Robert-Nicoud, 2013; Ortalo-Magné and Prat, 2014; Duranton and Puga, 2015). In addition, some studies argue that local developers may also influence local land use regulations by lobbying for pro-growth policies (e.g., Molotch, 1976; Fischel, 2008; Glaeser et al., 2005; Hilber and Robert-Nicoud, 2013), with Solé-Ollé and Viladecans-Marsal (2012) providing some empirical evidence.