Tianyang Xi - Assistant Professor, National School of Development, Peking University
Collusion between businessmen and officials relies upon strong trust. In China, bureaucratic rotations and promotions across jurisdictions are a common practice. When officials are transferred to new places, it is hard for them to immediately establish trust with local businesses. Consequently, they tend to bring their trusted businessmen along with them. This paper studies this phenomenon using two unique administrative datasets, firm registry and bureaucratic promotion databases. We find an immediate spike in investment flow, particularly in real estate and construction industries, accompanying transferred officials. We show that the jump in investment flow is mainly driven by collusion rather than by better information. Firms investing in the new places following the transferred officials enjoy greater profitability when their “umbrella” (connected official) is in office, but are more likely to shut down after the “umbrella” leaves office. The collusion crowds out new business and dampens innovations of existing firms.
Tianyang Xi is currently an assistant professor at the National School of Development, Peking University. His research interests include political selection, bureaucracy, and political conflicts.