Can Governments Harvest Connections with Firms? Evidence from China

Can Governments Harvest Connections with Firms? Evidence from China
Date & Time: 
Thursday, May 18, 2017 -
12:45 to 13:45
Yu-Hsiang Lei (Yale-NUS)
Room 1100, NYU Shanghai | 1555 Century Avenue, Pudong New Area, Shanghai

It is well-known that governments sometimes favor connected firms. This paper provides evidence on the reverse - firms providing favors to governments in a reciprocal relationship - exploiting a natural experiment from China. In October 2001, the tax revenue sharing rule between central and local governments was unexpectedly reformed: the higher the local tax revenue in 2001, the higher the share that local governments would get post-2001. From a newly collected dataset, I find that before the reform the governments that granted more favors to firms - access to credit and tax deductions - were able to mobilize more assistance from firms in order to raise the tax revenue in 2001. Furthermore, this reciprocation is not an institutional relationship, but hinges on a repeated interaction between firms and local leaders. Exploring the variation in leadership turnover, I find that firms who had previously received government favors provided no assistance to leaders who would soon leave office. These results are consistent with a theory of reciprocal relationships between governments and firms. My findings not only suggest that governments and firms can form dynamic relationships to exchange favors intertemporally, but also shed light on the government-business relationship in China.