Investing like conglomerates? When local governments diversify beyond public services

Warren Bailey, Jianchao Fan, Jing Liu and Yinggang Zhou

Economics of Transition and Institutional Change, 2025, vol. 33, issue 3, 583-615

Abstract: We examine government decision‐making by studying Chinese local government financing vehicles (LGFVs), an often‐criticized funding and investment channel. We find an inverted U‐shaped relationship between LGFV diversification and subsequent local economic growth confirmed by identification using policy and regulatory events. The inverted U‐shape is stronger when local economic development or government indebtedness is higher. The degree of diversification reflects career concerns and decision‐making biases of local political leaders. Thus, bad economic outcomes follow when local governments venture beyond public services, borrow aggressively and invest in too many businesses. Our findings echo the empirical literature on corporate conglomerates.

Date: 2025
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https://doi.org/10.1111/ecot.12440

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Persistent link: https://EconPapers.repec.org/RePEc:wly:ectrin:v:33:y:2025:i:3:p:583-615

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