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Local Crowding Out in China

Author

Listed:
  • Yi Huang

    (The Graduate Institute, Geneva, and CEPR)

  • Marco Pagano

    (University of Naples Federico II, CSEF, EIEF, CEPR and ECGI)

  • Ugo Panizza

    (The Graduate Institute, Geneva, and CEPR)

Abstract

In China, between 2006 and 2013 local public debt crowded out the investment of private firms by tightening their funding constraints, while leaving state-owned firms'investment unaffected. We establish this result using a purpose-built dataset for Chinese local public debt. Private firms invest less in cities with more public debt, the reduction in investment being larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms'investment is more sensitive to internal cash flow, also when cash-flow sensitivity is estimated jointly with the probability of being credit-constrained.

Suggested Citation

  • Yi Huang & Marco Pagano & Ugo Panizza, 2017. "Local Crowding Out in China," EIEF Working Papers Series 1707, Einaudi Institute for Economics and Finance (EIEF), revised Feb 2019.
  • Handle: RePEc:eie:wpaper:1707
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    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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