Political favoritism in China’s capital markets and its effect on city sizes

November 12 2015

This paper examines political favoritism of cites in national capital markets and the effect of that favoritism on city sizes. The paper estimates the city-by-city variation in the prices of capital across cities in China from 1998 to 2007. It relates how the prices facing the highest order political units and overall cross-city price dispersion change with changes in national policy and leadership. The effect of capital market favoritism on city growth after the national relaxation of migration restrictions in the early 2000’s is investigated. The elasticity of the city growth rate with respect to the price of capital is estimated to be - 0.07 in the OLS approach and -0.12 in the IV approach.

Journal of Urban Economics, 2017, 98, 69-87

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Vernon Henderson joined the LSE in September 2013 as School Professor of Economic Geography, having previously been Eastman Professor of Political Economy at Brown University, USA.

Ying Chen