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The Matching of Heterogeneous Firms and Politicians

  • Maggie X. Chen


    (Department of Economics/Institute for International Economic Policy, George Washington University)

We use a unique Chinese firm-director panel dataset and a simple assignment model to examine the matching mechanism of heterogeneous firms and politicians. Based on 36,308 detailed biographies, we identify directors that previously held bureaucratic positions and classify the rank of each position in the Chinese political hierarchy. We address three questions using this direct measure of political capital: First, how do firms with heterogeneous productivity match with politicians with different political ability? Second, what determines the price of political capital? Finally, is there significant short-term return from political investment? Our results indicate that more productive firms are more likely to hire politically endowed individuals. The incentive increases in the dependence on external financing and decreases in the extent of foreign ownership. Conditional on the probability of being hired, individuals with greater political ability receive more compensation than their co-workers. One-step increase in political ladder from municipal to provincial level is equivalent to an annual pay increase of US$17,359. Education attainment, on the other hand, has little effect. The estimated return of political investment is sensitive to the control of matching, stressing the importance of taking into account the endogeneity of politician recruitment.

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Paper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2009-05.

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Length: 42 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:gwi:wpaper:2009-05
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