Price Regulation and Economic Growth in China

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2022

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Hong, Haidi

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What is the causal effect of price regulation on economic growth? It is an unsolved problem for empirical research in economics, as most price regulation policies are endogenous to the economic performance. This thesis provides the first (causally identified) empirical analysis of the effect of price regulation on economic growth. I successfully identify a perfectly exogenous variable-the regulatory price of fuel in China. There are several factors contributing to the exogeneity of regulatory price, such as, provincial and city's geography, the highly centralized pricing mechanism, belated response from central government, and complex activation conditions on regulatory price adjustment. I construct a unique panel dataset of 289 prefecture cities from 1998 through 2018. It is the first time that the existence and prevalence of overcharging behaviors-petrol stations setting sales price higher than regulatory price-are clearly documented in the dataset. This thesis answers the research question from both theoretical and empirical aspects. My macroeconometric analysis builds on solid microeconomic foundation-aggregate Marshallian surplus increases as binding regulatory price increases. As the underlying assumption of classical partial equilibrium model is that the sales price cannot exceed the regulatory price, I develop a simple model to feature the overcharging behaviors. The model predicts that the marginal total surplus of regulatory price is still positive if the risk of violating price regulation is not too large to deter the sellers from overcharging consumers. I estimate the causal effect via both time series and panel data techniques. First, by constructing a complete quarterly dataset on macroeconomic aggregates and using VAR model, I show that GDP responses significantly and positively to the regulatory price. Further analysis reveals that the changes of regulatory price have asymmetric effects on GDP; that is, GDP responses significantly to a smaller downward adjustment rather than a larger upward adjustment. Second, I use fixed effect model to find that 1% increase in regulatory price causes 2.69% increase in GRP (gross regional product). I also find that GRP responses more to the binding regulatory price than to the non-binding. Finally, by employing panel VAR model, I show the dynamic and permanent effects of regulatory price on regional economic growth.

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Thesis (PhD)

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