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Tournament-Style Political Competition and Local Protectionism: Theory and Evidence from China

Author

Listed:
  • Hanming Fang

    (University of Pennsylvania)

  • Ming Li

    (Chinese University of Hong Kong)

  • Zenan Wu

    (Peking University)

Abstract
We argue that inter-jurisdictional competition in a regionally decentralized authoritarian regime distorts local politicians’ incentives in resource allocation among firms from their own city and a competing city. We develop a tournament model of project selection that captures the driving forces of local protectionism. The model robustly predicts that the joint presence of regional spillover and the incentive for political competition leads to biased resource allocations against the competing regions. Combining several unique data sets, we test our model predictions in the context of government procurement allocation and firms’ equity investment across Chinese cities. We find that, first, when local politicians are in more intensive political competition, they allocate less government procurement contracts to firms in the competing city; second, local firms, especially local SOEs, internalize the local politicians’ career concerns and invest less in the competing cities. Our paper provides a political economy explanation for inefficient local protectionism in an autocracy incentivized by tournament-style political competition.

Suggested Citation

  • Hanming Fang & Ming Li & Zenan Wu, 2022. "Tournament-Style Political Competition and Local Protectionism: Theory and Evidence from China," PIER Working Paper Archive 22-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:22-031
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    References listed on IDEAS

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    2. François Chimits, 2023. "What Do We Know About Chinese Industrial Subsidies?," CEPII Policy Brief 2023-42, CEPII research center.

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    More about this item

    Keywords

    Political Competition; Local Protectionism; Government Procurement; Firm Investment;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • P30 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - General

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