January 29, 2016
News /
Posted by NCID

Yu-Hsiang Lei from London School of Economics gave a seminar presenting his research project titled: “Can Governments Harvest Connections with Firms? Evidence from China”.

His research analyzes the relationship between the local governments and firms in China. Yu-Hsiang Lei focuses on a tax-sharing reform between central and local governments in China in 2011. “Local governments were incentivized to raise tax revenue in a short period of time”, explained Lei, which prompted local governments to turn to firms for assistance. In practice, this meant firms “moving money around” to artificially inflate local revenues.

In answering the titular question, he estimates whether pre-existing levels of government-to-firm favors are a predictor for raising revenue after the reform, proxying for favors as access to credit or tax deductions provided over 476 counties in China.

“What I find is that if governments before the reform had granted more favors to local firms, then governments can mobilize more firms’ assistance to raise the tax revenue” said Yu-Hsiang Lei.

The two measurable favors correspond to the two predominant types of firms: state-related firms and private firms.

According to his research state-related firms can receive government favors through access to credit. “Banks in China are state-owned so access to credit is a great favor in China, so this favor is mostly targeted by state related firms”, said Yu-Hsiang Lei. On the other hand private firms would better benefit from a tax reduction favor.

In contrast to the many studies that estimate how firms benefit from corruption, Yu-Hsiang Lei summarized, “what I am providing is one of the first systematic evidence on what government can actually gain from firms”, and added, “connections work as dynamic relationships to exchange favors inter-temporally.”

Yu-Hsiang Lei ended his presentation emphasizing that policymakers, “should bear in mind that a policy which leaves room for governments seeking assistance from firms to fulfill their objectives would highly promote cronyism.”