Elasticity of Substitution Between Capital and Land in Housing Market, the Case of Xi’an, China

The substitution of capital and land affects urban development to a great extent, which plays an important role in shaping urban morphology. The elasticity of substitution between them also reflects the maturity of the real estate market. Studies on this aspect need to be abundant, especially at the city level in China, so that the work is motivated to estimate the elasticity of capital-land substitution with Xi’an, a rapidly urbanized city showing an active housing market. Based on the housing production functions this paper constructs the model of constant elasticity of substitution (CES) and makes an empirical study using the residential land transaction data along with the corresponding data of the housing market of Xi’an in 2018. The result suggests that the elasticity of substitution between capital and land obtained by CES is 0.6611, which implies that the land market is active and the intensive use of land in the Xi’an is also on a relatively high level. In addition, this paper discusses the spatial variation of elasticity of capital-land substitution and finds that this metric in Xi’an is generally high in the city center and low in the surrounding areas. The findings of this paper have practical significance for urban spatial planning and providing reference in formulating housing market policy.