How do individual politicians affect privatization? Evidence from China

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Title: How do individual politicians affect privatization? Evidence from China
ISBN: 978-952-323-347-8
Author: Ru, Hong ; Zou, Kunru
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
ISSN: 1456-5889
Series year: 2020
Series number: 21/2020
Year of publication: 2020
Publication date: 1.9.2020
Pages: 45
Subject (yso): poliitikot; yksityistäminen; valtionyhtiöt; korruptio; yritykset; politiikka
Keywords: Bofit-kokoelma; Kiina
JEL: D73; G30; L3
Other keywords: China; patronage connection; rent-seeking; privatization; SOE
Abstract: This paper investigates how politicians’ patronage connections affect privatizations in China. The connections to top political leaders (i.e., Central Committee of the Communist Party of China) make local politicians engage more in rent-seeking by selling state-owned enterprises (SOEs) at substantial discounts. These connected local politicians are also more protected in anti-corruption investigations, thus extracting more rents by selling SOE assets at substantial discounts. Consequently, the privatizations conducted by the local politicians with patronage connections achieve significantly lower gains in efficiency and performance. To identify the role of patronage connection in privatization, we use the mandatory retirement age cut-offs of Central Committee members in the regression discontinuity design. We find drops in price discounts of privatization deals and jumps in efficiency for privatized SOEs when local politicians lose connections to Central Committee members around the retirement age cut-offs.
Table of contents: Abstract ..... 4 1 Introduction .... 5 2 Background and hypothesis .... 9 2.1 History of SOE privatization reform in China .... 9 2.2 Hypothesis development .... 10 2.3 Politician patronage connections and retirement age cut-offs .... 11 3 Data and summary statistics ....13 3.1 Firm-level privatization data .... 13 3.2 Politician profile data ..... 14 3.3 Summary statistics .... 15 4 Empirical analysis and results .... 18 4.1 Privatization outcomes and individual politicians .... 18 4.2 Regression discontinuity design .... 21 4.3 Rent-seeking underlying worse privatization outcomes .... 28 4.3.1 Value loss in privatizations .... 28 4.3.2 Protections from patronage .... 30 5 Conclusion .... 32 References .... 33 Appendix figures and tables .... 37

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