Social Stability and Resource Allocation within Business Groups

Abstract

Exploiting data on intra-group transactions and unexpected shocks to regional stability in China, I show that the business groups of state-owned enterprises (SOEs) use internal funds to address social unrest. The government allocates more funds to SOEs in areas affected by social unrest, which are then used, at shareholders’ costs, to generate additional labor payments and investments. However, social sentiment recovers, given these benefits. This SOE channel is large in magnitude, compared to fiscal redistribution, and is stronger when local governments are budget-constrained. This paper provides evidence that the intra-group allocation of resources incorporates political objectives and generates socio-economic impact.

Keywords: business groups, internal capital market, political economy, social stability

JEL Classification: G32, G34, D74, P16