The Consequences of Political Hierarchy: Evidence From Chinese SOEs

ABSTRACT Using a comprehensive dataset containing a detailed nine‐level political hierarchy classification for all state‐owned enterprises (SOEs) in China from 1998 to 2013, we find that low‐ranked SOEs have 14% higher productivity than private firms. The result is robust to propensity score matching, instrumental variable approach, and within‐firm analysis. Further findings lend support to the theory of local government's protection as opposed to local information advantage. Macro‐level results suggest that growth benefits might lead local government to resist the central government reform of ending low‐ranked SOEs.