Local Leadership Turnover and Firm Subsidies in China

• In Event: Chinese Politics Mini-Conference: The Political Economy of State-Business Relations

Abstract

Subsidies and other forms of government funding can be used by politicians for private gain. Similar to how government funds are used to win votes by politicians in democracies, in autocracies politicians use government budget strategically for career advancement and personal enrichment. However, distributing funds can be politically risky, since it cuts into the local budget and can be received by economic actors that are later implicated in corruption and other misdeeds. Especially when there is information asymmetry between local politicians and economic actors, it is unclear to politicians ex ante as to who the funds should be distributed to in order to achieve their career goals.

We argue that promotion-seeking local politicians consider political risks as well as political returns when making economic decisions. When the payoffs are not immediately clear in a low information environment, politicians use heuristics to make decisions that minimize political risks instead of maximize potential returns. We propose that firm ownership types serve as a useful source of informational shortcuts for local politicians especially when they arrive at a new locality, providing them with inferential information about firms' political connectedness and importance.

We test our argument in the context of China during its fiscal stimulus period starting in 2008. Using firm-level subsidies data combined with leadership turnover data at the provincial level from 2007 to 2015, we find that new provincial governors, immediately after taking office, distribute a smaller proportion of subsidies to private firms relative to SOEs after provincial-level political turnover, with the effect lasting for around two years. This finding suggests that when a new governor takes office and does not yet fully understand the local business-state landscape, he would use heuristics or informational shortcuts to make important decisions and to avoid making mistakes. This strategy proves to be effective, with governors who adopt such a strategy more likely to be promoted at the end of their tenure.

Authors

• Yue Hou, University of Pennsylvania

• Siyao Li, University of Pennsylvania