Factor price distortions and resource misallocation are important sources of productivity differences between regions. Promoting the free flow of factors of production is conducive to giving full play to the decisive role of the market in allocating resources, which is crucial to helping a country’s economy develop in a high-quality and sustainable manner. This paper proposes a new approach to measuring factor market distortions and establishes the relationship between factor price distortions and a country’s economic growth. This paper examines the resource misallocation and efficiency loss of 31 provinces in China from 2004 to 2020, and proposes an analytical framework for resource misallocation among regions, with which the Total Factor Productivity (TFP) and the factor price distortion of provinces in China are calculated. The calculation results indicate that the TFP of China’s provinces gradually declines from the eastern coast to the western inland. The resource allocation efficiency in the eastern and central areas is higher than that in the western areas, so is the factor price, and its distortion causes nearly 6% of loss of output value in China. China’s economic growth is still reliant on the increase of factor input and technological development and the improvement of resource allocation efficiency has no significant effect on growth.

Factor price distortions and resource misallocation are important sources of productivity differences between regions. Promoting the free flow of factors of production is conducive to giving full play to the decisive role of the market in allocating resources, which is crucial to helping a country’s economy develop in a high-quality and sustainable manner. This paper proposes a new approach to measuring factor market distortions and establishes the relationship between factor price distortions and a country’s economic growth. This paper examines the resource misallocation and efficiency loss of 31 provinces in China from 2004 to 2020, and proposes an analytical framework for resource misallocation among regions, with which the Total Factor Productivity (TFP) and the factor price distortion of provinces in China are calculated. The calculation results indicate that the TFP of China’s provinces gradually declines from the eastern coast to the western inland. The resource allocation efficiency in the eastern and central areas is higher than that in the western areas, so is the factor price, and its distortion causes nearly 6% of loss of output value in China. China’s economic growth is still reliant on the increase of factor input and technological development and the improvement of resource allocation efficiency has no significant effect on growth.

The impact of digital economy on factor market distortion in China: Before and during the COVID-19 pandemic

About the Project The KAPSARC Energy Model of China (KEM China) project began in 2014 to study energy and environmental issues in China. KEM China has been developed to understand China’s energy economy and fuel mix, how they are impacted by government intervention, as well as their interaction with global markets. It is a modular integrated mixed-complementarity problem model that optimizes supply decisions, minimizing fuel and technology costs, while taking into account the effect of government regulation on prices and the environment.Key PointsWhen energy sectors transition from government-controlled to market-driven systems, the legacy regulatory instruments can create unintended market distortions and lead to higher costs. In China, the most notable regulatory throwback is ceilings on electricity prices that generators can charge utilities, which are specified by plant type and region. We built a mixed complementarity model calibrated to 2012 data to examine the impact of these price caps on the electricity and coal sectors. Our study highlights the following major findings: Capped on-grid tariffs incentivize market concentration and vertical integration so that generators can cross-subsidize power plants, ensure an uninterrupted supply of fuel and reduce the impact of volatility in fuel prices. Tight price caps can cause the system to deviate from the least-cost capacity and fuel mix. In 2012, this resulted in an additional annual cost of at least 45 billion RMB, or 4 percent of China’s total power system cost. The government also had to subsidize some of the losses, which indicates that this regulatory design is not responsive to market realities. Price constraints can impact the outcomes of other policy initiatives causing them to veer from intended goals. In the case of China, according to our modeling, greater installed wind capacity does not have a significant impact on the amount of coal consumed. Also, abolishing restrictive tariff caps on coal-fired generation does not increase coal use because the utilization rate of peak-shaving coal plants drops. We also estimate, using the model, subsidies required for a range of wind capacity additions to China’s power generation mix and find that the feed-in tariff could have been less generous.

Factor price distortions and resource misallocation are important sources of productivity differences between regions. Promoting the free flow of factors of production is conducive to giving full play to the decisive role of the market in allocating resources, which is crucial to helping a country’s economy develop in a high-quality and sustainable manner. This paper proposes a new approach to measuring factor market distortions and establishes the relationship between factor price distortions and a country’s economic growth. This paper examines the resource misallocation and efficiency loss of 31 provinces in China from 2004 to 2020, and proposes an analytical framework for resource misallocation among regions, with which the Total Factor Productivity (TFP) and the factor price distortion of provinces in China are calculated. The calculation results indicate that the TFP of China’s provinces gradually declines from the eastern coast to the western inland. The resource allocation efficiency in the eastern and central areas is higher than that in the western areas, so is the factor price, and its distortion causes nearly 6% of loss of output value in China. China’s economic growth is still reliant on the increase of factor input and technological development and the improvement of resource allocation efficiency has no significant effect on growth.

Test results of mediating mechanism: Factor market distortion mitigation.

Exploring the determinants of green total factor productivity (green TFP) is of great importance to economic performance and ecological sustainability. Based on the data of 30 provincial units in China from 2004 to 2016, this study first analyzes the mechanism of land transfer marketization (LTM) affecting green TFP through resource allocation, then the regional resource allocation level is measured using the indicator of factor market distortion, and regional green TFP is estimated by the slack-based measure (SBM) directional distance function and Malmquist–Luenberger (ML) index. On the basis of that, a panel threshold regression model is used to empirically examine the theoretical mechanism of LTM affecting green TFP through the intermediate variable of resource allocation. We find that there is one single-threshold effect between LTM, resource allocation, and green TFP taking resource allocation as the threshold variable. Specifically, while the degree of resource mismatch is lower than 0.1371, the coefficient of LTM on green TFP is 0.1553; otherwise, the coefficient changes to −0.2776. This study concludes that LTM would significantly increase green TFP when the degree of regional resource mismatch is below the threshold; otherwise, it would have an inhibitory effect on the development of green TFP. In addition, the economic development level, R&D investment, and infrastructure level can, to a certain extent, contribute to the improvement of green TFP. The findings have three important policy implications for the land transfer policy of local governments, investment strategies of enterprises, and differentiated policy services.