Favor With Fear: Risk-driven Favoritism in Government Procurement in China

Abstract

This paper advances the literature on distributive politics by analyzing a form of political favoritism driven by the career uncertainties faced by officials. We argue that political leaders provide regime insiders with favors in a high-risk environment in non-democratic regimes. To empirically test this political risk theory, we draw on a novel dataset of government procurement contracts constructed by several machine learning algorithms. We match our procurement contracts database with firms publicly listed on the Chinese stock market between 2008 and 2018. Leveraging China's recent anticorruption campaign as a case, we show that insider favor, measured by state-owned enterprises' (SOEs') premium in government procurement, increased sharply in the wake of the campaign. The SOE premium is more salient in provinces exposed to central corruption inspections, where the perceived political risk is high. Evidence also shows that risk-driven favoritism leads to allocation distortions that lower firm productivity.

Keywords: Favoritism, Political Risks, Public Procurement, Anticorruption Campaign, China

JEL Classification: H57, P21, P31