Year-End Rush and Career Concern: Theory and Evidence from China's Patent Applications

Abstract

This paper proposes a theory of the year-end rush, a phenomenon that is also often referred to as the “fourth-quarter effect”, which records a year-end surge of investments or activities commonly observed in organizations. The theory shows that in a multi-period tournament in which interim performances are observable, the contestants who lag behind in the penultimate period will be more aggressive in the last period to catch up. More importantly, to alleviate this aggressive response, the contestants purposely set an effort level lower in the early periods than in the last, a result we interpret as the year-end rush. Since the promotion of Chinese officials in the bureaucratic hierarchy is well-known to be a tournament, to empirically support this theory, we use the data of patent applications in China (1985-2019) to show that (i) there is substantial year-end rush of patent applications across all Chinese cities, and (ii) the extent of a city’s year-end surge exhibits a strong and significant positive relation with its rank-order in interim performance within the province it belongs to. China’s policy of patent growth target has been widely criticized for resulting in this year-end rush, which brings down patent quality. We show that the underlying cause of year-end rush is not growth target, but career concern as induced by tournament between the local officials, and growth target only exacerbates it.