Working Paper: CEPR ID: DP17423
Authors: Emanuele Colonnelli; Ernest Liu; Li Bo
Abstract: We study the demand for government participation in China’s venture capital and private equity market. We conduct a large-scale, non-deceptive field experiment in collaboration with the leading industry service provider, through which we survey both sides of the market: the capital investors and the private firms managing the invested capital by deploying it to high-growth entrepreneurs. Our respondents together account for nearly $1 trillion in assets under management. Each respondent evaluates synthetic profiles of potential investment partners, whose characteristics we randomize, under the real-stakes incentive that they will be introduced to real partners matching their preferences. Our main result is that the average firm dislikes investors with government ties, indicating that the benefits of political connections are small compared to the cons of having the government as an investor. We show that such dislike is not present with government-owned firms, and this dislike is highest with best-performing firms. Additional results and follow-up surveys suggest political interference in decision-making is the leading mechanism why government capital is unattractive to private firms. We feed our experimental estimates and administrative data into a simple model of two-sided search to discuss the distributional effects of government participation. Overall, our findings point to a “grabbing hand” interpretation of state-firm relationships reflecting a desire by the government to keep control over the private sector.
Keywords: N/A
JEL Codes: N/A
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government ties (H10) | GP preferences (D79) |
| dislike for government ties (P16) | potential investment from government-tied LPs (H54) |
| high-performance of GPs (D29) | dislike for government ties (P16) |
| ownership structure (government-owned GPs) (L32) | aversion to government ties (P26) |
| type of government ties (central government agencies) (H10) | aversion to government ties (P26) |
| type of government ties (local government ties) (H73) | level of dislike for government ties (D72) |