Investing with the Government: A Field Experiment in China

61 Pages Posted: 22 Jun 2022

See all articles by Emanuele Colonnelli

Emanuele Colonnelli

University of Chicago - Booth School of Business

Bo Li

Tsinghua University - School of Economics & Management

Ernest Liu

Princeton University

Multiple version iconThere are 3 versions of this paper

Date Written: June 21, 2022


We study the demand for government participation in China’s venture capital and private equity market. We conduct a large-scale, non-deceptive field experiment in collaboration with the leading industry service provider, through which we survey both sides of the market: the capital investors and the private firms managing the invested capital by deploying it to high-growth entrepreneurs. Our respondents together account for nearly $1 trillion in assets under management. Each respondent evaluates synthetic profiles of potential investment partners, whose characteristics we randomize, under the real-stakes incentive that they will be introduced to real partners matching their preferences. Our main result is that the average firm dislikes investors with government ties, indicating that the benefits of political connections are small compared to the cons of having the government as an investor. We show that such dislike is not present with government-owned firms, and this dislike is highest with best-performing firms. Additional results and follow-up surveys suggest political interference in decision-making is the leading mechanism why government capital is unattractive to private firms. We feed our experimental estimates and administrative data into a simple model of two-sided search to discuss the distributional effects of government participation. Overall, our findings point to a “grabbing hand” interpretation of state-firm relationships reflecting a desire by the government to keep control over the private sector.

JEL Classification: C93,D2,D20,D22,G0,G02,G18,G28,G3,G38,G4,O0,O1,O14,O16,O17,O25,O3,O38,O4,O40,O47

Suggested Citation

Colonnelli, Emanuele and Li, Bo and Liu, Ernest, Investing with the Government: A Field Experiment in China (June 21, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-79, Available at SSRN: or

Emanuele Colonnelli (Contact Author)

University of Chicago - Booth School of Business ( email )


Bo Li

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084

Ernest Liu

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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