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Free market initiatives: Benefits and distortions from political power

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  • Qi Zhang
  • Bin Zhao

Abstract

This study examines the effects of China's Free Trade Zone (FTZ) initiative on firm performance and how these effects vary by firms' political power. Using a staggered difference‐in‐differences design in two settings, we find that FTZ implementation increases return on assets, total factor productivity, and exports. These gains are larger for state‐owned and politically connected firms, especially in productivity. Mechanism analyses suggest that politically advantaged firms benefit more from lower effective tax rates and reduced financial expenses. The findings show that political power distorts the gains from market liberalization and limits equal access to reform opportunities.

Suggested Citation

  • Qi Zhang & Bin Zhao, 2026. "Free market initiatives: Benefits and distortions from political power," Economic Inquiry, Western Economic Association International, vol. 64(3), pages 931-954, July.
    • Handle: RePEc:bla:ecinqu:v:64:y:2026:i:3:p:931-954
    DOI: 10.1111/ecin.70062
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