For the purpose of food security, China implements a stringent system of farmland protection — the “1.8 Billion Mu (120 Million Hectares) Red Line of Farmland”. The economic impact of the “Red Line Policy” (RLP) has not been studied enough using quantitative analysis. Combining prefecture data, micro land transaction data and remote sensing data, this paper empirically analyzes how the policy affects the scale, source, and characteristics of local governments’ land leasing by the DID method. It demonstrates that the RLP significantly restrains the scale of construction land leasing, especially the incremental construction land (ICL) leasing, through the channel of decreasing the ratio of ICL transferred from farmland. The policy effect is larger in the subsamples of non-city-district and low-level land. The quantity constraint encourages local governments to raise required floor area ratios, increase market-based leasing and shorten construction time, which are conducive to improving land use efficiency, but may also have a certain negative impact on local public finance.
This paper may have the following contributions: (1) Given the dual urban-rural structure of land ownership in China, we demonstrate that a quantity constraint on farmland in rural areas can decrease the land leasing scale in urban areas, through the mechanism of reducing the percentage of new construction land transferred from farmland, which used to be a major source. (2) We discuss how the farmland protection policy changes the micro behaviors of local governments’ land leasing, including locations, leasing requirements and land use efficiency. (3) It deepens our understanding of how local governments balance between the trade-off of central-government regulations and local economic incentives. (4) Based on the results, we attempt to give several suggestions on how to improve the land regulation policy in China.