Essays on Land Allocation and Foreign Direct Investment Policies

The first chapter argues that the dramatic population decline in China in recent years is partly an unintended consequence of local governments’ land allocation decisions, driven by industrial discounts in the land market. I provide institutional background and empirical evidence on land allocation in China. Three novel empirical findings illuminate land allocation behavior over the past decade: First, using detailed records of urban land transactions, I find that industrial land is leased at an average discount of 47% relative to residential land. Second, this pro-industrial discount varies across cities and is particularly pronounced in more developed coastal areas, indicating a stronger prioritization of industrial use in those regions. Third, using microdata from the China Census Survey, I document a negative relationship between city-level fertility rates and the share of industrial land. These empirical patterns lay the foundation for the theoretical analysis in the next chapter, which examines how government land allocation decisions influence household fertility behavior.
Chapter Two develops a theoretical model to analyze the comparative statics of fertility decisions in response to housing prices, which are endogenously shaped by land allocation policies. A central feature of the model is the trade-off between industrial and residential land: to boost economic output, local governments allocate more land to industrial usage, thereby reducing the supply of residential land, driving up housing prices, and ultimately suppressing fertility. I employ a numerical approach to investigate the interactions between land allocation, population control policies, and public expenditure policies, and to evaluate their effects on equilibrium outcomes. The model yields two main findings. First, under the One-child Policy, China’s fertility rate was substantially below the replacement level. However, a shift to a market-based land allocation system without price distortion could have increased the fertility rate. Second, consistent with the “quantity-quality” trade-off, an increase in fertility leads to a decline in per-child educational investment. However, increased public investment in education can reduce the financial burden on parents, thereby mitigating this trade-off and simultaneously raising both education levels and fertility rates.
The third chapter is an empirical analysis of a Foreign Direct Investment (FDI) preferential policy in China, which grants corporate income tax reductions to firms with foreign equity shares of at least 25%. I document two novel empirical facts that reveal the behavioral response to this notch-based tax scheme. First, a significant number of joint ventures bunch precisely at the 25% foreign ownership threshold, resulting in a 20.8% increase in total FDI. Second, joint ventures at the 25% threshold exhibit a notable discount in both firm size and total factor productivity, suggesting a performance cost associated with meeting the tax incentive threshold. These findings speak to the policymaker that when taking the cost into consideration, the consequence of utilizing tools such as tax subsidies to manipulate foreign investors’ acquisition in multinational enterprises may be complicated to interpret. Therefore, this empirical research motivates a future extension to explore how different tax schemes shape the ownership structures of joint ventures, particularly in the context of incomplete contracts.