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Playing Favorites: Tax Incentives and Urban Growth in China, 1978–2010

This study examines whether locationally preferential tax incentives for firms encourage differential urban expansion in China. Using satellite-based data from 1978 to 2009, we find that zones established early tend to have large and persistent effects, and that provincially determined zones have little impact relative to those designated by national authorities. Zones established later tend only to have effects where counties already had an export-advantageous position. We conclude that such policies can encourage differential growth in the presence of significant distortions in the rest of the economy, but become less effective as these distortions are removed. (JEL O18, R58)