The Limits of a Centralized Bureaucracy: Evidence from the Stock Market in China
51 Pages Posted: 4 Jun 2020
Date Written: May 6, 2020
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: Suggested Citation