Land hoarding and investment strategies of enterprises under land price regulation: Evidence from bunching analysis

Abstract

Price control over factor inputs affects economic efficiency. We introduce a new perspective—bunching estimation with reference-dependent preferences—into examining land price regulation to understand corporate economic behaviors under policy shocks. Since 2007, China has set the minimum prices for industrial lands to prevent local governments from underpricing state-owned land. Consequently, 43% of land parcels experienced price increases and were sold above their price floors. Corporate land purchase/investment behaviors changed in both normal-pricing and underpricing situations. With price floors being reference points, concessional underpricing tempted enterprises into land hoarding and overinvestment. Heterogeneous impacts existed across space, time, and firm entities. Private firms reacted more strongly than state-owned enterprises. Inland exhibited a greater policy reaction than the coast. The reaction was more pronounced in earlier years of policy implementation. These findings have profound policy implications and external validity for emerging countries leveraging land resources for economic development. Even if the price control is not binding, it may still signal a reference point that could create a subtle, multifaceted distortion of corporate behaviors. Land hoarding and overinvestment, which could add risk and crowd out resources, are among the caveats of China's industrial price regulation. Policymakers should exercise caution in market regulations to avoid unintended consequences and support resilient urban development.