How Does Political Connection Affect Resource Allocation in China

Paul-Emile Bernard ()
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Paul-Emile Bernard: University of Paris-Dauphine, PSL

No DT/2025/05, Working Papers from DIAL (Développement, Institutions et Mondialisation)

Abstract: This paper examines the role of political connections in shaping firm-level resource allocation in China. Using administrative data, I distinguish between national and local ties and estimate their effects on subsidies, capital costs, and tax liabilities. Politically connected managers secure systematically larger transfers and face more favorable financial conditions. National connections increase access to direct subsidies, while local ties reduce capital costs and effective tax rates. A difference-in-differences design reveals that nationally connected firms receive 38% higher annual subsidies over four years. Locally connected firms lower their capital costs by 2.5%. Political access substitutes for marketbased allocation.

Keywords: Political Connection; Subsidy; Tax Avoidance; Misallocation (search for similar items in EconPapers)
JEL-codes: D24 D72 H2 L38 L52 O25 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2025-07
New Economics Papers: this item is included in nep-cna, nep-pbe, nep-pol, nep-sea and nep-soc
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