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Joint Industrial Organization & Public Economics Workshop - Panle Barwick

Thu, 05/11/2017 - 11:40am

Panle Barwick

Cornell University

498 Uris Hall

"Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market (joint w/Shengmao Cao & Shanjun Li)"

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, the largest automobile market in the world. Using a census of vehicle registration records,  we show that joint ventures (JVs) and especially state-owned enterprises (SOEs) command much higher market shares in their headquarter province than at the national level. Results from a spatial regression discontinuity analysis at provincial borders and falsification tests suggest that this pattern is not driven by differences in consumer preference or dealer network, and point to local protectionism such as subsidies as the primary contributing factor. We then set up and estimate a market equilibrium model to quantify the impact of local protectionism, controlling for other demand and supply factors. Our counterfactual simulations show that local protectionism leads to significant choice distortions and consumer welfare loss exceeding 40% of total subsidy. Some protected firms would not have been profitable in the absence of protection. Finally, each province faces a prisoner's dilemma: even though the whole society benefits from removing local protection, no province has any private incentive to remove protection unilaterally. In the long run, local protectionism could have important impacts on market structure such as firm entry and exit as well as resource allocation across regions.

Event Categories: Industrial Organization