Wednesday, 22 July 2009

Corruption in land auctions

Not so shocking result of the day - that there is corruption is Chinese real estate sales.

This is still excellent work though and a good paper.

China's Land Market Auctions: Evidence of Corruption"

NBER Working Paper No. w15067

HONGBIN CAI, Peking University - Guang Hua School of Management
Email: hbcai@gsm.pku.edu.cn
J. VERNON HENDERSON, Brown University - Department of Economics, National Bureau of Economic Research (NBER)
Email: j_henderson@brown.edu
QINGHUA ZHANG, Peking University - Guang Hua School of Management
Email: zhangq@gsm.pku.edu.cn

This paper studies the urban land market in China in 2003--2007. In China, all urban land is owned by the state. Leasehold use rights for land for (re)development are sold by city governments and are a key source of city revenue. Leasehold sales are viewed as a major venue for corruption, prompting a number of reforms over the years. Reforms now require all leasehold rights be sold at public auction. There are two main types of auction: regular English auction and an unusual type which we call a "two stage auction". The latter type of auction seems more subject to corruption, and to side deals between potential bidders and the auctioneer. Absent corruption, theory suggests that two stage auctions would most likely maximize sales revenue for properties which are likely to have relatively few bidders, or are "cold", which would suggest negative selection on property unobservables into such auctions. However, if such auctions are more corruptible, that could involve positive selection as city officials divert hotter properties to a more corruptible auction form. The paper finds that, overall, sales prices are lower for two stage auctions, and there is strong evidence of positive selection. The price difference is explained primarily by the fact that two stage auctions typically have just one bidder, or no competition despite the vibrant land market in Chinese cities.

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