Firm-Politician Nexus and Local Public Finance under Trade Shocks: Evidence from China’s Primary Land Market

Abstract

How do local governments raise revenues for stimulus measures when facing economic downturns? We document a novel firm-politician connection channel by examining transactions in China’s primary land market during export slowdown in the 2010s. Using a shift-share instrumental variable approach to exploit variation in export shock, we show that cities exposed to a larger export slowdown experience an increase in land sale revenues, driven by purchases by private firms connected to local officials. The export slowdown is associated with increases in both the area and price of land purchased by these connected firms. We also show heterogeneous effects consistent with the connection-induced land revenue contributions. Finally, we show evidence consistent with politicians and connected firms exchanging favors: land revenues from connected firms mitigate the adverse impact of economic shocks on local economies and politicians’ individual careers; these firms who purchased land in connected cities during negative shocks receive more government subsidies and loan access afterward.