“Land-Use Policy as Industrial Policy: Firm Selection, Spatial Misallocation, and Rural-Urban Redistribution”
Abstract
This paper studies how preferential allocation of urban land to manufacturing affects productivity, output and welfare through firm selection and rural-urban migration. Using evidence from China's primary urban land market, I document that prefectures with larger industrial land price discounts allocate more land and employment to manufacturing and sustain more firms, yet have lower average productivity and only modestly higher manufacturing output. Firm-level patterns point to weaker selection, while rural migrants account for much of the associated manufacturing employment. I develop and calibrate a spatial equilibrium model with heterogeneous firms, rural-urban migration and land allocation between industrial and residential uses to quantify the aggregate and distributional consequences of industrial land price discounts. Equalizing within-prefecture land prices between industrial and residential uses reduces manufacturing output by 5.2% but raises average manufacturing productivity by about 7% through stronger firm selection. Urban welfare rises by 2.3%, mainly driven by cheaper housing, whereas rural welfare falls by 0.6% as urban manufacturing labor demand contracts. A welfare-maximizing land allocation that preserves manufacturing output raises aggregate welfare by 0.8% while reducing the aggregate industrial land share by only 0.5 percentage points. These results highlight the importance of where industrial land is allocated and how firm selection and migration shape the distributional consequences of industrial policy.