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Political promotion and labor investment efficiency

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  • Kong, Dongmin
  • Liu, Shasha
  • Xiang, Junyi

Abstract

This study investigates the effect of political promotion incentives on the labor investment efficiency of firms by focusing on human capital misallocation. We show that 1) promotion incentives of local politicians significantly increase firm-level employment growth and decrease labor investment efficiency. 2) Causality is established using the number of death toll in local mining accidents to isolate exogenous shocks on the promotion incentives of local politicians, and placebo tests further confirm the causality. 3) For under-hiring firms, promotion incentives only increase the employment of low human capital, thus distorting human capital structure and decreasing labor investment efficiency. 4) Our findings are robust to alternative specifications. Overall, we highlight the political economy channel of human capital misallocation from the perspective of career concerns of local politicians.

Suggested Citation

  • Kong, Dongmin & Liu, Shasha & Xiang, Junyi, 2018. "Political promotion and labor investment efficiency," China Economic Review, Elsevier, vol. 50(C), pages 273-293.
  • Handle: RePEc:eee:chieco:v:50:y:2018:i:c:p:273-293
    DOI: 10.1016/j.chieco.2018.05.002
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    Keywords

    Political promotion; Human capital misallocation; Labor investment efficiency; China;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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