Reforming the world's largest heating system: Quasi-experimental evidence from China

Market reform of the public sector has long been considered as an effective way to improve productivity and has been intensively examined over the past century. China has the world's largest district heating system; however, it has a significant impact on sustainable development because this large and highly coal-dependent public heating sector is associated with great X-inefficiency. To overcome these challenges, the government launched a market-oriented pilot reform of the heating sector in 2003. This study used a quasi-experimental approach to examine the reform's effect on the heating enterprises' total productivity and identify the mechanisms. We applied the difference-in-difference method using the Chinese Industrial Enterprises Database from 1998 to 2015. The empirical evidence indicates that the reform significantly improved the heating enterprises' total factor productivity by increasing profitability, retrenching intermediate costs, upgrading investments, and optimizing market structure. These findings provide the first empirical evidence regarding China's latest market-oriented public utility, which holds relevance for future heating reform in other developing countries. •As the world's largest heating system, China's heating sector suffers great sustainable challenge•Using a quasi-experimental approach, the causal effect of China's heating reform is assessed.•The market reform significantly improves heating enterprises' total-factor productivity by 2.3–7.4%.•The reform's effect varies by different firm size and ownership•The reform affects productivity through price effect, investment effect, and structural effect