Mengwei Lin, Job Market Candidate

Local Policies and Firm Location:  The Role of Leaders' Promotion Motives in China

This paper investigates the impact of local government competition on the spatial distribution of firms and the role of leaders' promotion motives in intensifying such competition. Local governments compete by offering city-wide policies, such as lowering tax rates, giving subsidies, providing financial support, or loosening environmental regulations. The difference between what is practiced and what is legally mandated is non-negligible, and many of these policies remain unobservable due to limited data accessibility. To address this issue, I introduce a novel method to quantify the net effect of various policies proposed by local governments. This net effect, referred to as the policy index, is identified using data from all manufacturing plant locations along with a spatial border design. When applying this method to Jiangsu, a province in China with 13 competitive cities, all ranked in the top 100 by GDP over the past decade, I find that geographically proximate cities tend to adopt similar industrial policies. I then incorporate the estimated policy index into a promotion competition framework to understand how policies are determined in equilibrium and how competition, in turn, affects the business landscape. Counterfactual simulations demonstrate that only 23% of firms would choose a different location if leaders' incentives were the same across all cities.