The Consequences of Political Hierarchy: Evidence From Chinese SOEs

Abstract

Using a comprehensive dataset containing a detailed nine-level political hierarchy classification for all state-owned enterprises (SOEs) in China from 1998 to 2013, we find that low-ranked SOEs have 14% higher productivity than private firms. The result is robust to propensity score matching, instrumental variable approach, and within-firm analysis. Further findings lend support to the theory of local government's protection as opposed to local information advantage. Macro-level results suggest that growth benefits might lead local government to resist the central government reform of ending low-ranked SOEs.