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How Does Political Connection Affect Resource Allocation in China

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  • Paul-Emile Bernard

    (University of Paris-Dauphine, PSL)

Abstract

This paper examines the role of political connections in shaping firm-level resource allocation in China. Using administrative data, I distinguish between national and local ties and estimate their effects on subsidies, capital costs, and tax liabilities. Politically connected managers secure systematically larger transfers and face more favorable financial conditions. National connections increase access to direct subsidies, while local ties reduce capital costs and effective tax rates. A difference-in-differences design reveals that nationally connected firms receive 38% higher annual subsidies over four years. Locally connected firms lower their capital costs by 2.5%. Political access substitutes for marketbased allocation.

Suggested Citation

  • Paul-Emile Bernard, 2025. "How Does Political Connection Affect Resource Allocation in China," Working Papers DT/2025/05, DIAL (Développement, Institutions et Mondialisation).
    • Handle: RePEc:dia:wpaper:dt202505
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    File URL: https://dial.ird.fr/wp-content/uploads/2025/07/2025-05-subsidies-and-PC.pdf
    File Function: First version, 2025
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    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L38 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Policy
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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