The Limits of a Centralized Bureaucracy: Evidence from the Stock Market in China

51 Pages Posted: 4 Jun 2020

See all articles by Yishuang Li

Yishuang Li

New York University (NYU), Department of Politics, Students

Zhenhuan Lei

University of Wisconsin - Madison - La Follette School of Public Affairs; University of Wisconsin - Madison - Department of Political Science

Date Written: May 6, 2020

Abstract

Recent research shows that political centralization can reduce elite capture and improve governance outcomes. Despite these benefits, we demonstrate that there is a limit for an independent-minded, centralized bureaucracy to eliminate the influence of private and local interests. We study a highly centralized approval-based system of initial public offerings (IPOs) in the Chinese stock market. Such a system is designed to avoid the influence of private, local interests and select well-performing firms for IPO based solely on efficiency criteria. However, we find that seemingly powerless provincial politicians can still strongly influence the allocation of IPOs in favor of loyal mayors by cooperating strategically with central bureaucrats. Hence, firms in loyal subordinates’ cities are more likely to receive IPO approval. These findings contribute to our understanding of the limits of centralized bureaucracy as a tool to improve governance outcomes and prevent the influence of local and private interests.

Keywords: bureaucracy, centralization, China, distributive politics, political alignment, political connection, stock market

Suggested Citation

Li, Yishuang and Lei, Zhenhuan, The Limits of a Centralized Bureaucracy: Evidence from the Stock Market in China (May 6, 2020). Available at SSRN: https://ssrn.com/abstract=3594874 or http://dx.doi.org/10.2139/ssrn.3594874

Yishuang Li (Contact Author)

New York University (NYU), Department of Politics, Students ( email )

New York, NY
United States

Zhenhuan Lei

University of Wisconsin - Madison - La Follette School of Public Affairs ( email )

1225 Observatory Drive
Madison, WI 53705
United States

University of Wisconsin - Madison - Department of Political Science ( email )

Madison, WI
United States

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