Rotation, performance rewards, and property rights

Abstract Economic growth needs a strong and well-functioning government. But a government too strong can dominate private firms, leading to a holdup problem that is especially severe in autocracies. This paper studies how to constrain local officials in autocracies through personnel rules, with a special focus on rotation and performance-based evaluation. Through a game theoretic model, I show that rotation or performance evaluation alone makes the holdup problem even worse. But it is exactly their combination that covers each other’s weakness and solves the holdup problem together. Firm-level panel data from China are consistent with the key predictions of the model.