Empirical Analysis of the Driving Factors of China’s ‘Land Finance’ Mechanism Using Soft Budget Constraint Theory and the PLS-SEM Model

Abstract

“Land finance” refers to the key fiscal strategy in which local governments in China generate revenue through land grant premiums and land tax revenues. A burgeoning body of literature has focused on the driving factors of China’s land finance from different aspects including fiscal decentralization, revenue decentralization, competition among local governments, land marketization, infrastructure development, and economic development. However, little research has provided a comprehensive perspective integrating social, economic and institutional aspects to investigate the driving forces of these unique and profound issues in China. This study aims to investigate the driving factors and working mechanism of land finance. A theoretical and empirical model was proposed using soft budget constraint theory and least squares structural equation modeling (PLS-SEM). The panel data of 35 Chinese major cities were assessed between 2006 and 2015. The empirical results contend the following: (1) the land transfer and fiscal systems provide the key impetus for land financing because the land transfer system forms a stable modality, and the fiscal system is an important incentive for land financing; (2) the effects of the economic development and political system are insignificant; and (3) the political and land systems significantly influence economic development. Our contributions focus on two aspects. Firstly, a comprehensive framework of factors germane to land finance is constructed. Secondly, a new research methodology for land use study is proposed. To the best of our knowledge, the current study is the first to employ the PLS-SEM method to delineate and verify the influence paths between multiple driving factors and land finance in different cities. Hence, research reliability can be improved.