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The Economic Impact of China's Anti-Corruption Campaign

45 Pages Posted: 5 Jul 2017 Last revised: 17 Sep 2017

Nan Chen

University of California, Berkeley - Marketing Group

Zemin (Zachary) Zhong

University of Toronto, Rotman School of Management

Date Written: September 16, 2017

Abstract

Corruption could either benefit economic growth by “greasing the wheel,” or distort supply of public goods and create inefficiency. Empirically testing the impact of corruption is difficult due to its evasive nature. We take an alternative approach by investigating the economic impacts of anti-corruption policies. We focus on China's recent anti-corruption campaign, the largest of its kind in recent history. As an important initiative of this campaign, the Communist Party's Provincial Committees of Discipline Inspection (PCDI) send inspector teams to investigate municipal governments for potential corruption. The variation in their timing allows us to use a difference-in-difference design to identify their impact on local economy. Using two unique administrative datasets of vehicle and business registration, we find that PCDI visits have a negative impact on both car sales and new business entry. For vehicles, the effect is surprisingly uniform across different price tiers: Luxury brands exhibit a similar drop as domestic brands, suggesting corruption's impact permeates households across a wide income spectrum. Over time, the effect is strengthening: We observe a 2% drop in the first three months of PCDI visit and a 10% drop one year afterward. The especially large impact cannot be explained by the decline in government officials' consumption behavior, suggesting anti-corruption efforts also affect the private sector. We test the idea using business registration data, and we found PCDI visits indeed discourage new business registration. We validate our empirical strategy by showing that (1) the timing of PCDI visits cannot be predicted by observable county characteristics and (2) car registrations exhibit parallel pre-treatment trends. Our results suggest there may be a trade-off in anti-corruption and economic growth.

Keywords: Corruption, Political Economy, China

JEL Classification: D73, P16, H70, L62

Suggested Citation

Chen, Nan and Zhong, Zemin (Zachary), The Economic Impact of China's Anti-Corruption Campaign (September 16, 2017). Available at SSRN: https://ssrn.com/abstract=2996009

Nan Chen

University of California, Berkeley - Marketing Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Zemin (Zachary) Zhong (Contact Author)

University of Toronto, Rotman School of Management ( email )

105 St. George St.
Rotman School of Management
Toronto, Ontario M5S 3E6
Canada

HOME PAGE: http://zacharyzhong.com

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