Local Protectionism, Market Structure, and Social Welfare: China’s Automobile Market
Panle Jia Barwick
- American Economic Journal: Economic Policy (Forthcoming)
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 (JVs) and state-owned
enterprises (SOEs) 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% 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.
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