Institutional trust as a catalyst: Government procurement and private firms’ risk-taking in China

This study investigates the impact of government procurement on corporate risk-taking among private firms in China’s transitional economy, using institutional trust theory to illuminate the underlying transmission mechanisms. Using a sample of 15,364 firm-year observations of Chinese A-share private listed firms that spanning 2015–2022, we find that government procurement significantly promotes corporate risk-taking behaviors. This effect is mediated by three channels: facilitating market access, enhancing credit availability, and enabling risk-sharing. Despite potential frictions stemming from procedural unfairness, payment delays, and policy discontinuity, our results demonstrate that the trust-building mechanisms inherent in government procurement prevail over these potential frictions, resulting in a net positive impact. Heterogeneity analyses reveal that local government procurement has a stronger impact than central government procurement, and that larger firms and those located in the eastern and central regions derive greater benefits. Additional tests indicate that government procurement exhibits synergies with tax incentives, and generates negative spillovers for intra-city competitors, and ultimately enhances long-term firm value by fostering increased risk-taking. These findings positioning government procurement as an institutional catalyst mitigating market failures in contexts characterized by institutional weakness, contributing to the literature on policy transmission mechanisms and corporate risk-taking in transitional economies.