Market-Led Transactions and Illegal Land Use : Evidence from China

China's growing transactions of urban land-use rights (LURs) and the resultant rampant illegal land use since the 2000s have raised concerns about whether LURs are appropriately used to advance the public interest. In response to such concerns, beginning in the 2000s, the Chinese central government strongly urged local governments to adopt the market-led transaction (MLT) approach. Theoretically, we expect MLTs to enhance the competition and transparency of LUR decisions, but empirically existing loopholes in MLT adoption might undermine the effectiveness of market mechanisms. Using a multi-level analysis model with a two-level structure (time and province), this study empirically tests whether the MLT reform has reduced illegal land use by local governments, as the Chinese central government intended. Our results demonstrate that even after controlling for yearly and provincial variations, a 1 percent increase in the MLT adoption rate results in a 0.765 percent decrease in illegal land use cases and a 1.45 percent decrease in illegal land use area. The adoption of market-led transactions (MLTs) in the 2000s can be seen at least to have prevented an increase in illegal land use during a period of very rapid economic and urban development. The other notable finding is the inverse U-shaped trend of MLT adoption, where the year 2008 was a turning point. Before 2008, the MLT adoption rate continuously increased, reaching 43.4 percent in 2008; after that, the trend was reversed and the MLT adoption rate dropped to 27.0 percent in 2012. We suggest that the Chinese government should continue to utilize market mechanisms as a policy instrument to curb illegal land use and also try to close institutional loopholes to improve implementation