Political Decisions in a Low Information Environment: Local Leadership Turnover and Firm Subsidies in China
51 Pages Posted: 27 Jul 2020 Last revised: 2 May 2021
Date Written: April 3, 2021
How do new politicians distribute government resources in regimes with no electoral considerations? We argue that when the payoffs are not immediately clear in a low information environment, politicians use heuristics to make decisions that minimize political risks. We propose that for new local politicians, firm ownership types serve as a useful source of informational shortcuts to evaluating political importance, and this decision making process benefits state-owned firms. Using firm-level subsidies data in China combined with leadership turnover data at the provincial level from 2007 to 2015, we find that new provincial governors, immediately after taking office, distribute a significantly smaller proportion of subsidies to private firms relative to state-owned enterprises. The effect gradually attenuates as new governors understand local conditions and establish connections with local private firms. This strategy also proves to be politically effective, with governors who adopt such a strategy more likely to be promoted at the end of their tenure.
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