Political connections and labor investment efficiency: Evidence from China's private firms

In: Economics & politics, Volume 35, Issue 3, p. 696-717

Abstract

AbstractThis study investigates whether political connections affect labor investment efficiency. We test this question in the context of China's private firms, where we find that political connections are negatively associated with labor investment efficiency. We also explore the channels through which political connections reduce labor investment efficiency and provide evidence that political connections aggravate both agency problems and information asymmetry. Further tests show that the influence of political connections is more pronounced for firms with overinvestment problems or high‐level political connections, and for firms from regions facing severe unemployment or loose anticorruption. Overall, our results are consistent with the "grabbing hand" argument that politicians destroy firm operational efficiency.