This paper examines the fiscal motives behind municipal governments' decisions to allocate commercial and residential land when two categories of land use are subject to different fiscal revenue alternatives: business-related tax and/or land rent. We use urban parcel-level land transfers during China’s peak period of urbanization, match commercial parcels with residential parcels, and find significant price discounts on commercial parcels relative to adjacent residential parcels. The observed discounts arise from the future tax flows from commercial use, i.e., expected taxes from developed commercial land reduce its transfer price. We conduct a structural estimation to examine the implications on land use structure of future taxes lowering land transfer prices. Results show that while prospective taxes increase commercial land supply, a significant portion of the favorable treatment impact is mitigated by market price responses, suggesting that the land market counters commercial land favoritism when local revenues include both business-related taxes and land value-based charges. The results have implications for the design of urban public revenue systems.

Document Type

Working Paper


Spring 1-2024


Fiscal incentives, Land transfer, Spatial matching, Land use




Working Papers Series


Economic Policy | Economics | Public Affairs, Public Policy and Public Administration | Public Policy



Additional Information

An earlier version of this paper was presented at the China Urban Economics Scholars Forum (2021), Workshop on Spatial Political Economy at Sun Yat-Sen University (2021), Summer Forum of the China Economics Annual Conference (2021), Frontiers of Public Finance Workshop at Xiamen University (2022), Finance and Taxation Forum at Central University of Finance and Economics (2022) ,Applied Micro Workshop at Shandong University (2022), 2023 AREUEA National Conference at the Westin Washington D.C., the 10th International Workshop on Regional, Urban, and Spatial Economics in China at Peking University (2023) ,and 79th Annual Congress of the International Institute of Public Finance at USU, Logan, USA. We are grateful for the insightful feedback and suggestions from the discussants and participants. Tang and Hou acknowledge the financial support from the National Natural Science Foundation of China (#71973080) and the Lincoln Institute of Land Policy, respectively.

Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.



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