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Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market

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Abstract

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.

Citation

Barwick, Panle Jia, Shengmao Cao, and Shanjun Li. 2021. "Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market." American Economic Journal: Economic Policy, 13 (4): 112-51. DOI: 10.1257/pol.20180513

Additional Materials

JEL Classification

  • L24 Contracting Out; Joint Ventures; Technology Licensing
  • L32 Public Enterprises; Public-Private Enterprises
  • L62 Automobiles; Other Transportation Equipment; Related Parts and Equipment
  • O14 Industrialization; Manufacturing and Service Industries; Choice of Technology
  • O18 Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
  • P25 Socialist Systems and Transitional Economies: Urban, Rural, and Regional Economics
  • R12 Size and Spatial Distributions of Regional Economic Activity
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