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

72 Pages Posted: 27 Jan 2023 Last revised: 23 Jan 2024

See all articles by Zeren Li

Zeren Li

National University of Singapore

Songrui Liu

Renmin University of China - School of Applied Economics

Date Written: January 17, 2024

Abstract

This paper advances the literature on distributive politics by analyzing a form of risk-driven favoritism where political leaders provide regime insiders with favors when facing increased career uncertainty. We document this risk-driven favoritism in the context in which officials distribute procurement contracts with firms in China. We develop a novel dataset of procurement contracts and match it with publicly listed firms. Leveraging China's recent anticorruption crackdown for the empirical analysis, we show that insider bias, measured as state-owned enterprises' premiums in public procurement, increased by 20% after the campaign began in 2013. The bias is more salient in provinces exposed to corruption inspections, where the perceived political risk is higher. Evidence shows that the SOE premium is not driven by central policy shifts or other corporate explanations. Moreover, we show that this risk-driven favoritism leads to distortions that lower the quality of procurement contract winners and firm productivity.

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

JEL Classification: H57, P21, P31

Suggested Citation

Li, Zeren and Liu, Songrui, Favor With Fear: Risk-driven Favoritism in Government Procurement in China (January 17, 2024). Available at SSRN: https://ssrn.com/abstract=4338925 or http://dx.doi.org/10.2139/ssrn.4338925

Zeren Li (Contact Author)

National University of Singapore ( email )

Singapore, 129791
Singapore

Songrui Liu

Renmin University of China - School of Applied Economics ( email )

59 Zhong Guan Cun Avenue
Hai Dian District
Beijing, 100872
China

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