The Source of Land Finance:Fiscal Pressure or Investment Incentives

Abstract

Land finance is the most important issue in China during the last decade,one explanation is that the local governments are pushed to sell the land because they have great fiscal pressure.This paper uses the natural experiment of newly appointed minister in China between 1998 and 2007 to test the hypothesis,we get several finds.Fistly,newly elected ministers significantly reduce the fiscal pressure of their hometown,those ministers will change the allocation of central earmarked grants and increase 12%grants for their hometown.Secondly,the reductions of fiscal pressure of ministers' hometown have no impact on the land finance behavior,the area and revenue of land sales have not changed.Thirdly,the real cause of land finance is the impulse to invest,even the earmarked grants are used for productive infrastructure but not the basic public service.The policy implications of this paper is that the future reform should focus on the land leasehold policy,while the decentralization is not a feasible way because the fiscal pressure is not the real cause of land finance.