Information and Corruption: Evidence from China’s Land Auctions

Abstract：

Since early 2000s, local governments in China are required to use public auctions to sell land parcels, ostensibly to reduce the prevalence of corruption under the previous system of price negotiation. Nonetheless, corruptions in land market remain widespread. This paper attempts to separately identify the roles of information and corruption to explain the difference between two-stage auction and English auction in China’s land market. I construct a structural model involving three types of players, a central government, a local government, and N bidders who can be asymmetric in their information and private costs. I find that first, the two-stage auction is more prone to corruption than English auction when information is asymmetric; and second, the local government is more likely to choose two-stage auction to sell land with lower values and to use the English auction on high-value land to maximize public benefits. Using a detailed data set that covers all land transactions in China between 2007 and 2017, I structurally estimate the model. Results show that land sold by the two-stage auction on average has a value lower than English auction by CNY 343/m2, explaining 43% of the observed price gap (selection effect); and the remaining 57% can be explained by the different bidding equilibrium of the two auction formats (corruption effect). I find that connected bidders have a significant information advantage over the unconnected ones, which allows them to bid higher and win more often. However, I also find that connected bidders have higher private costs which suggests a big efficiency loss. Finally, counter-factual results suggest that using English auction only and increasing public information disclosure can significantly reduce corruption and increase land revenues as well as social welfare.

Speaker Biography： 

Ming Li is a PhD candidate in the Department of Economics, University of Pennsylvania. Her research covers topics ranging from Chinese economy, political economy to empirical auctions. Her current research interests include China’s land market, the local governments’ role in shaping local fiscal and land policies, as well as the interaction between China’s legal system and labor market.