How Do Individual Politicians Affect Privatization? Evidence from China
67 Pages Posted: 9 Oct 2018 Last revised: 20 Jun 2021
Date Written: June 20, 2020
This paper examines the role of local politicians’ patronage connections to top political leaders (i.e., the Central Committee of the Communist Party of China) in privatization outcomes. We find that connected local politicians are more likely to sell state-owned enterprises (SOEs) to corrupt buyers at substantially discounted prices. The SOEs purchased by corrupt buyers engage in significantly more fraudulent and corrupt activities following privatization and thus perform worse. To identify these adverse effects of patronage connections on privatization, we use the mandatory retirement ages of Central Committee members in a fuzzy regression discontinuity design. When local politicians lose their connections because Central Committee members step down after reaching mandatory retirement ages, we find drops in the likelihood of choosing corrupt buyers and drops in price discounts for privatization sales. Consequently, the privatized SOEs experience jumps in efficiency gains after the age cut-offs for mandatory retirement.
Keywords: Patronage Connection, Privatization, Corruption, China
JEL Classification: D73, G30, L33
Suggested Citation: Suggested Citation