How Local Leadership Rotation Breaks State-Business Ties in China

Economic decentralization, while increasing regional autonomy in developing the economy, also increases the risk of government-business collusion and local capture. We argue that in authoritarian regimes, local leadership rotation mitigates collusion through breaking local government ties with business. We further propose that the nature of state-business ties is heterogeneous, with institutional government-business ties more stable, and personal government-business ties more easily broken. We test our theory in the context of local leadership turnovers and firm subsidies in China in the wake of the 2008 fiscal stimulus program. Using data from publicly listed firms, we find that new provincial governors, immediately after taking office, distribute significantly less subsidies to private enterprises. We also present suggestive evidence that governors have career incentives to distribute subsidies towards state-owned enterprises early in their tenure. Our findings illustrate that leadership rotation presents a partial solution to the problem of local capture in the absence of elections.