 Quid pro quo? Government-firm relationships in ChinaJournal of Public Economics, 2021, vol. 199, issue C Abstract: This paper studies favor exchange between governments and firms in China by exploiting a quasi-experiment tax reform. A tax revenue-sharing rule between central and local governments was announced in October 2001: the higher the local tax revenue in 2001, the higher the share of the tax revenue that stays at local afterward. I find that local governments that granted more favors to firms before the reform received more assistance from firms to raise the tax revenue in 2001; in turn, an abnormally high government subsidy was returned to firms that offered assistance. This paper demonstrates that a reciprocal relationship between governments and firms beyond the simple trading of personal favors could arise in non-democratic societies where politicians face no electoral incentives. The fact that firms and governments could mutually benefit from this reciprocal relationship helps explain the exceptional economic growth in China despite its unfavorable business environment. Keywords: Relational contract; Political connection; Chinese economy; Tax reform (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:199:y:2021:i:c:s0047272721000633 DOI: 10.1016/j.jpubeco.2021.104427 Access Statistics for this article Journal of Public Economics is currently edited by R. Boadway and J. Poterba More articles in Journal of Public Economics from Elsevier |
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