Garriga, Hedlund, Tang and Wang (2021) built a dynamic spatial general equilibrium model in which China's post-2003 house price divergence across cities is driven by structural transformation, government-controlled land release, and hukou-restricted rural-urban migration. The model treats city land supply as an exogenous path, abstracts from non-fundamental city-specific distortionary wedges that its own quantitative results expose (it over-predicts Guangzhou and under-predicts Shenzhen), and by its own statement cannot support welfare analysis of migration policy. The open research objective is the institutional supply-side extension: incorporate heterogeneous local governments that choose land release to pursue land-sale revenue ("land finance"), identify and model city-specific distortionary wedges separating prices from construction costs, and use the extended framework for the aggregate-efficiency and distributional evaluation of hukou and land-policy reforms that the original specification explicitly leaves for future work.

Background

China's housing markets experienced dramatic and increasingly dispersed price growth after the 2003 commercialization of urban housing. A central institutional feature is the hukou system — the household registration regime that ties entitlements (schooling, health care, subsidized grain historically) to a registered location and restricts permanent migration into large cities through quotas or points systems. A second feature is that urban land is owned by the state: local governments are monopoly suppliers of newly released residential land parcels, and land-lease sales became a major source of local fiscal revenue, a phenomenon known as land finance. A third is structural transformation: rising manufacturing productivity raised urban incomes and drew rural workers into cities. Garriga, Hedlund, Tang and Wang (2021, Regional Science and Urban Economics) assemble a spatial dynamic general equilibrium model — a quantitative model in which heterogeneous rural and urban households make migration and housing decisions across cities (Beijing, Shanghai, Guangzhou, Shenzhen, and representative tier-2 and tier-3 cities, i.e., progressively smaller cities ranked by administrative level and market size) while developers buy government-released land and build housing — calibrated to Chinese data for 2003-2015. They find that structural transformation and the induced urbanization, interacting with inelastic land release and developer entry fees, explain a large share of house price growth and its cross-city dispersion, with the notable exception of Guangzhou (over-predicted) and Shenzhen (under-predicted). Counterfactuals show that more egalitarian hukou or land-release policies promote urbanization but increase price dispersion. The framework is, however, positive rather than normative. The authors state that the model specification is not well suited to studying welfare — which in their setup depends on the timing of individual migration decisions — so questions of redistribution and aggregate efficiency in the spirit of Hsieh and Moretti (2019), who quantified how housing supply constraints misallocate labor across US cities, are left for future work. They note that the model could in principle be extended to heterogeneous local governments choosing land release to maximize land-sale revenue (which would yield predictions distinct from easing migration restrictions, since revenue-seeking land release raises land supply rather than land prices), but that the absence of city-specific land revenue share data blocked that extension. They also attribute the Guangzhou/Shenzhen fit failures to large non-fundamental market distortions — wedges between house prices and marginal construction costs inclusive of land, documented for Chinese cities by Deng, Tang, Wang and Wu (2020), who estimate city-specific housing and land price wedges and quantify spatial misallocation — and leave the identification and modeling of such wedges within the migration-housing framework unresolved. Companion and successor literature provides adjacent building blocks: the same authors' 2023 paper in the American Economic Journal: Macroeconomics adds mortgages and structural transformation but keeps land supply exogenous; Tang, Tang and Zhang (2024) build a dynamic spatial equilibrium model with hukou policy relaxation and compute aggregate and distributional welfare impacts; Fang and Huang (2022) and Liang, Song and Timmins (2024) quantify migration and housing-constraint effects on inequality and welfare in spatial equilibrium and sorting models; He (2022) studies endogenous land supply policy in a closed-economy dynamic stochastic general equilibrium (DSGE) model. What no existing work does is combine these pieces inside the multi-city dynamic framework: land release chosen by revenue-motivated local governments, estimated city-specific distortionary wedges, and the resulting normative evaluation of hukou and land policy.

Problem Statement

Extend the multi-city dynamic spatial equilibrium framework for China's rural-urban migration and house prices of Garriga, Hedlund, Tang and Wang (2021) — in which heterogeneous households migrate subject to hukou (household-registration) restrictions, developers build on government-released land, and structural transformation drives urban income growth — so that the institutional supply side is modeled rather than exogenous, and use the extended model for the normative analysis the original specification cannot deliver. Concretely, the problem, as posed by the source work's own statement of what it leaves unresolved, is to: (1) endogenize land supply by letting heterogeneous city governments choose land release so as to maximize land-sale revenue (land finance), replacing the exogenous land-release paths, with the data barrier of city-specific land revenue shares overcome by an explicit city-by-city measurement of those shares rather than by treating them as given; (2) identify and incorporate the non-fundamental, city-specific distortionary wedges between house prices and marginal construction costs inclusive of land that the source evidence documents for cities such as Guangzhou and Shenzhen, distinguishing them from fundamental productivity and amenity drivers; and (3) with the extended, calibrated model, quantify the welfare consequences of hukou reform and land-policy changes — aggregate efficiency, redistribution across and within cities, and the divergence between private and social optima arising from migration and land-supply externalities — in the spirit of Hsieh and Moretti (2019). These three components are jointly required and serve one scientific objective: a welfare-evaluable quantitative account of how China's institutional land-supply arrangements and city-specific distortions shape migration, house price divergence, and the allocative efficiency of policy reforms; resolving only one or two of them does not resolve the problem.

References

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