Local government consumption and firm performance: Evidence from the "TPCs" in China

Yu Qi, Jinliang Yu, Shubo Yang and Xiaoyi Xie

Journal of Asian Economics, 2022, vol. 80, issue C

Abstract: Government consumption is an important factor affecting corporate performance. By exploiting a unique data set that reveals the Three Public Consumptions (TPCs) of China’s prefecture-level city governments, this paper investigates the impact of actual local government consumption on corporate performance and identifies the potential impact mechanism. We show that increases in local government consumption did lead to declines in firm productivity. TPC expenditures on official cars and official receptions had the most obvious impact on corporate performance. After considering endogenous measurement errors and substitution variables, the conclusion remained stable. Moreover, we show that the increase of local government TPC expenditures caused an increase in corporate tax burden, a decline in government efficiency, and excessive administrative intervention, which in turn caused a decline in firm performance. Our findings are particularly pronounced in non-state-owned enterprises, in firms with tight financing constraints, and in regions with weak marketization and low budget transparency. This study expands the theory that government behavior affects corporate performance, and also provides policy implications regarding restraints on government consumption.

Keywords: Local government behavior; Three public consumption; Firm total factor productivity; Government consumption; China (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:80:y:2022:i:c:s1049007822000367

DOI: 10.1016/j.asieco.2022.101477

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