Abstract/Summary

This article explores the determinants of floor area ratio (FAR) limit, a major form of construction density regulation, in China. I develop a spatial equilibrium framework to study local governments’ optimal FAR design and investigate over 400,000 residential land transactions between 2007 and 2019 to perform the empirical analysis. Exploiting the exogenous variations generated by administrative adjustments and applying a propensity score matching approach, I find that a one standard deviation increase in local budgetary revenue decreases FAR limits by 0.29. Further counterfactual analysis suggests that the land finance model contributes to housing affordability issues and spatial inequality in China.