The Causal Effect of Price Regulation on Economic Growth: Evidence from China
Motivated by nationwide and regional oil shortages repetitively occurring in China during the 2000s and early 2010s, this paper studies the oil products pricing mechanism. I show that the provincial and city’s geography and the highly centralized pricing mechanism jointly establish the exogeneity of regulatory price, which enables me to identify its causal effect on gross regional product (GRP). By constructing a unique panel dataset for 289 prefecture cities from 1998 to 2018, I am the first to document the existence and prevalence of overcharging behaviors-petrol stations setting sales price higher than regulatory price. Using fixed effect model, I find that 1% increase in regulatory price causes 2.69% increase in GRP. I also find that GRP responses more to the binding regulatory price than to the non-binding, which is consistent with microeconomic theory. By performing panel VAR analysis, I show the dynamic and permanent effects of regulatory price on regional economic growth. Finally, my paper contributes to solve the long-standing China’s price puzzle–the confusing positive relationship between international crude oil price and GDP.