Working Paper: NBER ID: w30780
Authors: Hanming Fang; Ming Li; Zenan Wu
Abstract: We argue that inter-jurisdictional competition in a regionally decentralized authoritarian regime distorts local politicians’ incentives in resource allocation among firms from their own city and a competing city. We develop a tournament model of project selection that captures the driving forces of local protectionism. The model robustly predicts that the joint presence of regional spillover and the incentive for political competition leads to biased resource allocations against the competing regions. Combining several unique data sets, we test our model predictions in the context of government procurement allocation and firms' equity investment across Chinese cities. We find that, first, when local politicians are in more intensive political competition, they allocate less government procurement contracts to firms in the competing city; second, local firms, especially local SOEs, internalize the local politicians’ career concerns and invest less in the competing cities. Our paper provides a political economy explanation for inefficient local protectionism in an autocracy incentivized by tournament-style political competition.
Keywords: Political Competition; Local Protectionism; China; Resource Allocation; Government Procurement
JEL Codes: H11; H70; P30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased political competition among local politicians (D72) | Reduction in government procurement contracts allocated to firms from competing cities (H57) |
| Local firms internalize the career concerns of local politicians (M51) | Reduced investment in competing cities (R11) |
| Intensity of political competition (D72) | Allocation of contracts to firms in competing cities (L14) |