NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Panle Jia Barwick, Shengmao Cao, Shanjun Li

NBER Working Paper No. 23678
Issued in August 2017
NBER Program(s):IO, ITI, PE, POL

While China has made great strides in transforming its centrally-planned economy to a market-oriented economy, there still exist widespread interregional trade barriers, such as policies and practices that protect local firms against competition from non-local firms. 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. This market exhibits a salient feature that vehicle models by joint ventures (JVs) and especially state-owned enterprises (SOEs) command much higher market shares in their headquarter province than at the national level. Through spatial discontinuity analysis at provincial borders, falsification tests, and consumer surveys, we first confirm protective policies such as subsidies to local brands as the primary contributing factor. 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 simulations show that local protection leads to significant choice distortions, resulting in 18.7 billion yuan of consumer welfare loss, amounting to 40% of total subsidy. Provincial governments face a prisoner’s dilemma: according to our estimates, local protection reduces aggregate social welfare, but the provincial governments have no incentive to unilaterally remove local protection.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w23678

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us