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

This paper examines political favoritism of cites in national capital markets

Abstract

Policy bias towards politically favored cities in developing countries is a major policy issue, and can increase inequality among cities. This paper examines political favoritism of cites in national capital markets and the effect of that favoritism on city sizes in China. It estimates the city-by-city variation in the prices of capital across cities in China from 1998 to 2007, and relates how the prices facing the highest order political units and overall cross-city price dispersion change with changes in national policy and leadership. Controlling for other factors likely to be correlated with the costs of capital which also affect city growth, the study finds strong and suggestive evidence that lower costs of capital result in larger increases in city size. It also investigates the effect of capital market favoritism on city growth after the national relaxation of migration restrictions in the early 2000s.

This paper is a part of a Global Research Program on Spatial Development of Cities, funded by the Multi Donor Trust Fund on Sustainable Urbanization of the World Bank and supported by the UK Department for International Development.

Citation

Ying Chen, J. Vernon Henderson, Wei Cai, (2015) Political favoritism in China’s capital markets and its effect on city sizes

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

Published 1 October 2015