Inter-Provincial Market Fragmentation and Regional Economic Development in China

Abstract

This paper measures inter-provincial market fragmentation by adopting an adjusted priced-based approach from the Law of One Price using a three-dimensional panel of annual price on eight goods across 31 provinces in Mainland China during 1999–2015. By using the system Generalized Moment Estimation (GMM) approach, we analyze the non-linear effect of inter-provincial market fragmentation on regional economic development and its differences in various regions and periods. By constructing a Cross-Terms Model, we analyze the influence of various motivations of provincial governments on the non-linear relationship between inter-provincial market fragmentation and regional economic development. The results show that (1) Chinese domestic market fragmentation appears to have caused a fluctuating decline during 1999–2015. (2) The inter-provincial market fragmentation imposes an inverted U-shaped influence on regional economic development. It is necessary to maintain moderate market fragmentation for the promotion of regional economic development. (3) It is beneficial to maintain a lower degree of market fragmentation as time goes on. It is necessary to maintain a lower degree of market fragmentation in Eastern and Central China compared with Western China. (4) Compared with Social Stability and Official Positions Promotion, the motivation of Fiscal Revenue Enhancement requires the maintenance of a lower degree of inter-provincial market fragmentation for regional economic development.