Olson in China: Regional Chamber of Commerce, Political Brokers, and Firm Subsidies *

Abstract

Selective incentives are a crucial mechanism for preventing the free-rider problem in Olson's theory of collective action. This study analyzes the selective incentives offered by business interest groups in a weak institutional context. We demonstrate that the selective benefits provided by business associations include access to political leaders. These associations act as brokers, connecting member firms with powerful officials who offer particularistic benefits. We test this theory by matching a novel dataset on the membership of interprovincial chambers of commerce (CoCs) with the subsidy programs enjoyed by all publicly listed firms in China. Our dyadic analysis shows a sizable subsidy premium of chamber membership, with chamber firms receiving significantly more subsidies than nonchamber firms. Using detailed chamber personnel information, interviews, and legal documents, we demonstrate that the chamber premium is driven by the political connections embedded in these business associations. To verify the favorable exchange, we show suggestive evidence of the development and rent-seeking incentives of officials in interaction with these business associations.

Keywords: Business Interest Groups, Chamber of Commerce, Brokers, Firm Subsidies, China

JEL Classification: D72,P48