In the Shadows of the Government: Relationship Building During Political Turnovers

Abstract

We document that following a turnover of the Party Secretary or mayor of a city in China, firms (especially private firms) headquartered in that city significantly increase their "perk spending." Both the instrumental-variable-based results and heterogeneity analysis are consistent with the interpretation that the perk spending is used to build relations with local governments. Moreover, local political turnover in a city tends to be followed by changes of Chairmen or CEOs of state-owned firms that are controlled by the local government. However, the Chairmen or CEOs who have connections with local government officials are less likely to be replaced.