Open Access Journal Article

State intervention in land pricing and endogenous risk aversion

by Yong He a,* orcid
a
CERDI/CNRS, Universite Clermont-Auvergne, Clermont-Ferrand, France
*
Author to whom correspondence should be addressed.
JEA  2023 2(4):37; https://doi.org/10.58567/jea02040004
Received: 17 May 2023 / Accepted: 13 June 2023 / Published Online: 20 June 2023
View Full-Text
Download PDF

Abstract

This study explores the cause and effect of endogenous risk aversion in land pricing, where state intervention through taxation remains a general practice. Using a consumption-based asset pricing model incorporating taxation, it is shown that high taxation, due to the indexation effect, supporting land prices and reducing individuals' risk expectations, could lead to an endogenous decrease in risk aversion, which could result in market dysfunction because risk aversion plays a key role in the market mechanism. China, with its wholly state-owned land and the general use of land sales to cover financial deficits, is a typical case for empirical tests. The tests confirm that there, the rise in land prices was driven by the increase in reserve prices set by local governments, a strong means of taxation, and not by the market, indicating the endogenous decrease in risk aversion.

Keywords: Land pricing; stochastic discount factor; land taxation; the Lucas critique; endogenous risk aversion;
Copyright: © 2023 by He. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

Share and Cite

ACS Style
He, Y. State intervention in land pricing and endogenous risk aversion. Journal of Economic Analysis, 2023, 2, 37. https://doi.org/10.58567/jea02040004
AMA Style
He Y. State intervention in land pricing and endogenous risk aversion. Journal of Economic Analysis; 2023, 2(4):37. https://doi.org/10.58567/jea02040004
Chicago/Turabian Style
He, Yong 2023. "State intervention in land pricing and endogenous risk aversion" Journal of Economic Analysis 2, no.4:37. https://doi.org/10.58567/jea02040004
APA style
He, Y. (2023). State intervention in land pricing and endogenous risk aversion. Journal of Economic Analysis, 2(4), 37. https://doi.org/10.58567/jea02040004

Article Metrics

Article Access Statistics

References

  1. Alchian, A. A. & Demsetz, H. (1972). Production, information costs, and economic organization. American Economic Review, 62, 777-95. http://www.jstor.org/stable/1815199
  2. Arrow, K. J. (1965). The theory of risk aversion, Helsinki: Yrjo Jahnssonin Saatio, Reprinted in: Essays in the Theory of Risk Bearing, Chicago: Markham Publ. Co., 1971, 90–109.
  3. Barry, P. J. (1980). Capital asset pricing and farm real estate. American Journal of Agricultural Economics, 62(3), 549-553. https://doi.org/10.2307/124021
  4. Begley, T. M. & Boyd, D. P. (1987). Psychological characteristics associated with performance in entrepreneurial firms and smaller businesses. Journal of Business Venturing, 2(1), 79-93. https://doi.org/10.1016/0883-9026(87)90020-6
  5. Bellemare, M. F. & Brown, Z. S. (2010). On the (mis) use of wealth as a proxy for risk aversion. American Journal of Agricultural Economics, 92(1), 273–82. https://onlinelibrary.wiley.com/doi/abs/10.1093/ajae/aap006
  6. Berardi, M. (2016), Endogenous time-varying risk aversion and asset returns. Journal of Evolutionary Economics, 26(3), 581–601. https://DOI: 10.1007/s00191-015-0435-3
  7. Bird, R. M. & Slack, E. (2002). Land and property taxation around the world: a review. Journal of Property Tax Assessment and Administration, 7(3), 31-80.
  8. Breeden, D. T. (1979). An intertemporal asset pricing model with stochastic consumption and investment. Journal of Financial Economics, 7, 265–96. https://doi.org/10.1016/0304-405X(79)90016-3
  9. Buchanan, J. M. & Tullock, G. (1962). The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor: University of Michigan.
  10. Caliendo, M., Fossen, F. & Kritikos, A. (2010). The impact of risk attitudes on entrepreneurial survival. Journal of Economic Behavior & Organization, 76(1), 45-63. https://DOI:10.1016/j.jebo.2010.02.012
  11. Callen, M., Isaqzadeh, M., Long, J. D. & Sprenger, C. (2014). Violence and risk preference: Experimental evidence from Afghanistan. American Economic Review, 104(1), 123-48. https://DOI: 10.1257/aer.104.1.123
  12. Campbell, J. Y. & Cochrane, J. H. (1999). By force of habit: a consumption-based explanation of aggregate stock market behavior. Journal of Political Economy, 107, 205–51. https://doi.org/10.1086/250059
  13. Capozza, D.R. & Schwarm, G. (1989). The asset approach to pricing urban land: Some empirical results. AREUEA Journal, 17(2), 161–175. http://hdl.handle.net/2027.42/75058
  14. Chavas, J. P. & Thomas, A. (1999). A dynamic analysis of land prices. American Journal of Agricultural Economics, 81(4), 772-784. https://doi.org/10.2307/1244323
  15. Chinese Ministry of Land and Resources, Chinese Land and Resources Statistical Yearbook, 2000~2015, Beijing: Geological Press Edition.
  16. Chouquer, G. (2011). Aspects and characteristics of State-owned land in West Africa. Land Tenure and Development, Technical Committee, January 2011, AGTER, http://www.agter.org/bdf/en /corpus_chemin/fiche-chemin-147.
  17. Cochrane, J. H. (2005). Asset Pricing. Revised edition, Princeton and Oxford: Princeton University Press.
  18. Constantinides, G. M. (1990). Habit formation: a resolution of the equity premium puzzle. Journal of Political Economy, 98, 519–43. http://dx.doi.org/10.1086/261693
  19. Dai, Q. & Singleton, K. J. (2000). ‘Specification analysis of affine term structure models. Journal of Finance, 55, 1943–78. https://doi.org/10.1111/0022-1082.00278
  20. Department of Urban Socio-economic Surveys (National Bureau of Statistics of China), China City Statistical Yearbook. 2000~2015, Beijing: China Statistics Press.
  21. Dohmen, T., Lehmann, H. & Pignatti, N. (2016). Time-varying individual risk attitudes over the Great Recession: A comparison of Germany and Ukraine. Journal of Comparative Economics, 44(1), 182-200. https://doi.org/10.1016/j.jce.2015.10.002
  22. Fischel, W. A. (2001). Municipal corporations, homeowners and the benefit view of the property tax. In Property taxation and local government finance, Wallace E. Oates, ed., 33–77. Cambridge MA: Lincoln Institute of Land Policy.
  23. Görlitz, K. & Tamm, M. (2015). Parenthood and risk preferences, Available at SSRN 2618442.
  24. Gould, W. W. (1992). Quantile regression with bootstrapped standard errors. Stata Technical Bulletin, sg11.1, 9: 19–21. Reprinted in Stata Technical Bulletin Reprints, 2, 137–39, College Station, TX: Stata Press.
  25. Guiso, L., Sapienza, P. & Zingales L. (2018). Time varying risk aversion. Journal of Financial Economics, 128(3), 403-421. https://doi.org/10.1016/j.jfineco.2018.02.007
  26. Hamilton, B. W. (1976). Capitalization of intrajurisdictional differences in local tax prices. American Economic Review, 66(5), 743–753. https://www.jstor.org/stable/1827488
  27. Hanaoka, C., Shigeoka, H. & Watanabe, Y. (2018). Do risk preferences change? evidence from the great east japan earthquake. American Economic Journal: Applied Economics, 10(2), 298-330. https://DOI: 10.1257/app.20170048
  28. Haushofer, J. & Fehr, E. (2014). On the psychology of poverty. Science, 344(6186), 862-867. https://DOI: 10.1126/science.1232491
  29. Hayek, F. A. (1935). Socialist calculation I: the nature of the problem; Socialist calculation II: the state of the debate. in Hayek, 1976, Individualism and Economic Order, London: Routledge and Kegan Paul.
  30. Hetschko, C. & Preuss, M. (2019). Income in Jeopardy: How losing employment affects the willingness to take risks. Journal of Economic Psychology. https://DOI: 10.1016/j.joep.2019.05.005
  31. Holmström, B. & Tirole, J. (2001. LAPM: A liquidity‐based asset pricing model”, Journal of Finance, 56 (5), 1837-1867. https://doi.org/10.1111/0022-1082.00391
  32. Lange, O. (1936-1937). On the economic theory of socialism, part one”, Review of Economic Studies, Part one, 4(1), 53–71; Part two, 4(2), 123–42. http://hdl.handle.net/10.2307/2967609
  33. Lerman, Z. & Shagaida, N. (2007). Land policies and agricultural land markets in Russia. Land Use Policy, 24, 14–23. https://doi.org/10.1016/j.landusepol.2006.02.001
  34. Lucas, R. (1976). Econometric Policy Evaluation: A Critique. In Brunner, K. & Meltzer, A. eds. The Phillips Curve and Labor Markets. Carnegie-Rochester Conference Series on Public Policy, 1, 19–46, New York: American Elsevier. https://doi.org/10.1016/S0167-2231(76)80003-6
  35. Malmendier, U. & Nagel, S. (2011). Depression babies: do macroeconomic experiences affect risk taking? The Quarterly Journal of Economics, 126(1), 373-416. https://doi.org/10.1093/qje/qjq004
  36. Mieszkowski, P. (1972). The property tax: An excise tax or a profits tax? Journal of Public Economics, 1 (1), 73–96. https://doi.org/10.1016/0047-2727(72)90020-5
  37. Necker, S. & Ziegelmeyer, M. (2016). Household risk taking after the financial crisis. The Quarterly Review of Economics and Finance, 59, 141-160. http://dx.doi.org/10.2139/ssrn.2539016
  38. Nieβ, C. & Biemann, T. (2014). The role of risk propensity in predicting self-employment. Journal of Applied Psychology, 99(5), 1000-1009. https://DOI:10.1037/a0035992
  39. Pigou, A. C. (1932). The Economics of Welfare, 4th edition, London: Macmillan.
  40. Pratt, J. W. (1964). Risk aversion in the small and in the large. Econometrica, 32(1–2), 122–136. https://doi.org/0012-9682(196401/04)32:1/2<122:RAITSA>2.0.CO;2-W
  41. Pyle, W. (2009). Ownership and allocation of industrial land in Russia. Focus/Opinion, Expert view, 4/2009, Bank of Finland, Institute for Economies in Transition, (BOFIT).
  42. Sahm, C. R. (2012). How much does risk tolerance change? The quarterly journal of finance, 2(04), 1-38. http://DOI:10.1142/S2010139212500206
  43. Schildberg-Hörisch, H. (2018). Are risk preferences stable? Journal of Economic Perspectives, 32(2), 135-54. https://DOI: 10.1257/jep.32.2.135
  44. Tiebout, Charles M. (1956). A pure theory of local expenditures. Journal of Political Economy, 64(5), 416–424. https://doi.org/10.1086/257839
  45. Vincent, C. H., Hanson, L. A. & Argueta, C. N. (2017). Federal Land Ownership: Overview and Data. Congressional Research Service Report.
  46. Weber, M., Weber, E. U. & Nosić, A. (2013). Who takes risks when and why: determinants of changes in investor risk taking. Review of Finance, 17(3), 847-883. https://doi.org/10.1093/rof/rfs024
  47. Wickens M. (2011). Macroeconomic Theory, A Dynamic General Equilibrium Approach. Second edition, Princeton and Oxford: Princeton University Press.
  48. Zodrow, G. R. & Mieszkowski, P. (1986). The new view of the property tax: A reformulation. Regional Science and Urban Economics, 16 (3), 309–327. https://doi.org/10.1016/0166-0462(86)90028-1