This study documents the presence of local protectionism and quantifies its impacts on market competition and social welfare in the context of China's automobile market. A salient feature of
China's auto market is that vehicle models by joint ventures and state-owned enterprises command much higher market shares in their headquarter provinces than at the national level. Through
county border analysis, falsification tests, and a consumer survey, we uncover protectionist policies such as subsidies to local brands as the primary contributing factor to the observed home bias.
We then set up and estimate a market equilibrium model to quantify the impact of local protection, controlling for other demand and supply factors. Counterfactual analysis shows that local
protection leads to significant consumer choice distortions and results in 21.9 billion yuan of consumer welfare loss, amounting to 41 percent of total subsidy. Provincial governments face a
prisoner's dilemma: local protection reduces aggregate social welfare, but provincial governments have no incentive to unilaterally remove local protection.
Barwick, Panle Jia, Shengmao Cao, and Shanjun Li.
"Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market."
American Economic Journal: Economic Policy,
Contracting Out; Joint Ventures; Technology Licensing
Public Enterprises; Public-Private Enterprises
Automobiles; Other Transportation Equipment; Related Parts and Equipment
Industrialization; Manufacturing and Service Industries; Choice of Technology
Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
Socialist Systems and Transitional Economies: Urban, Rural, and Regional Economics
Size and Spatial Distributions of Regional Economic Activity