China's land market auctions: evidence of corruption?

TLDR

In China, urban land is allocated via leasehold sales by local officials, yet corruption persists through auction format choices and preauction deals between favored bidders and officials. The government aims to curb corruption by mandating public sales conducted either via English or two‑stage auctions. The study examines two auction formats—English and two‑stage—where the latter’s first stage signals that auctions are taken, discouraging other bidders. Empirical evidence shows that two‑stage auctions yield lower prices and less competition, and officials tend to divert more valuable properties to them.

Abstract

In China, urban land is allocated by leasehold sales by local officials. Attempting to end widespread corruption, the government now requires sales to be conducted publicly, by either English or “two‐stage” auctions. However, corruption persists through the choice of auction format and preauction side deals between favored bidders and local officials. Two‐stage auctions have a first stage where favored developers signal that auctions are “taken,” deterring entry of other bidders. Empirics show that both sales prices and competition are significantly less for two‐stage than English auctions. Selection on unobserved property characteristics is positive: officials divert hotter properties to two‐stage auctions.