Favor With Fear: The Distributional Effect of Political Risk on 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. 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. We leverage China's anticorruption campaign launched in late 2012 for empirical analysis. We show that insider favoritism, measured by state-owned enterprises' (SOEs’) premium in government procurement, increased sharply after the corruption crackdown began in 2013. 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, Government Procurement, Anticorruption Campaign, China

JEL Classification: H57, P21, P31