Ming Li

Information and Corruption: Evidence from China’s Land Auctions

Aimed at combating corruption and increasing transparency in land sale, China launched a massive reform which stipulates all land parcels to be sold through public auctions. However, in the operating process, sellers (local governments) usually have wide discretion over selecting auction format and withholding land information from buyers. In this paper, I examine how the English auction and the Chinese-style two-stage auction may end in different outcomes due to sellers’ private information of land parcels and, how this difference influences auction format selection by local governments. With a theoretical model to endogenize the incentive of local bureaucrats, this paper finds that 1) in general, land with lower value faces harder constraint for corruption, and 2) the two-stage auction is more prone to corruption than English auction when information is asymmetric. Consequently, local governments tend to use the two-stage auction on low-value land to maximize personal benefits but prefer 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 a common-value auction model where bidders are asymmetric in information and private costs. 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). In addition to asymmetric information, I also examine how private costs affect bidding outcomes. Usually, connected bidders have a significant information advantage over the unconnected ones, which allows them to bid higher and win more often. My analysis, however, also finds that connected bidders have higher private costs which suggests a big efficiency loss. Finally, I evaluate the impacts of several alternative land market designs. The 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.

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