China’s government officials have decision-making power over massive government subsidies intended to help firms, particularly state-owned enterprises, reduce their debt, increase their employment, and facilitate R&D. At the same time, intense competition for promotion prevents many officials with discretionary power over subsidies from advancing to higher echelons of power. How does the lure of post-government career opportunities for these officials affect their allocation of subsidies to firms while in office, and what is the cost to public spending?  

The data. The analysis draws from a database of detailed career records on over 16,000 officials that later became executives or directors at publicly listed firms between 1994 and 2019. Analysis of the resume text of firm directors and executives reveals 5,126 officials who had the potential power to influence subsidy decisions while in office. To document the exchange of favors between officials and firms, the author matched officials who eventually joined the private sector with over 160,000 subsidy programs disclosed by law that were approved by provincial-, prefectural-, and county-level governments in China from 2007 through 2019. 

Officials face incentives to join the private sector following government service. Limited institutional constraints (e.g., party competition or checks and balances) mean that local officials have the final say on many policy issues in their jurisdictions, including land sales, taxation, and public spending. Many of these officials stall in the bureaucratic hierarchy, however, given the intense competition for promotion to higher administrative ranks. Owing to their influence and power, experienced officials with low prospects of career advancement are attractive assets to firms’ business interests. Officials may also be incentivized to join the private sector because of the large wage gap: a mayor in China earns roughly $41,000, while a director in a publicly listed firm in China is estimated to have a salary of $170,000. 

 Types of officials that firms hire after their retirement

The analysis finds that firms hire officials primarily from government (79%) and party organs (9%), rather than the legislature, judicial system, military, or Youth League. Officials who go into the private sector are most commonly from provincial (39%), prefectural (37%), and county (24%) jurisdictions, and are usually leaders in a local department, bureau, or division. Few high-ranked officials, such as provincial vice governors, prefectural party secretaries, and mayors, join publicly listed firms. Rather, most officials that join firms are technocrats who have experience in functional departments and control finances and natural resources.  

Officials secure post-government employment by favoring firms while in office. Firms are six times more likely to recruit an official if the official had provided subsidies before joining the firm. Officials who later enter a firm provided between 12% and 15% more subsidies to their future employers than did other similar officials and provided 14.7% more subsidies to their future employers in their last three years of public service. Government officials also favor local firms, offering them 13.6% more than non-local firms.  

Following their time in office, officials who provided favorable benefits to a firm earn roughly 91% more than their peers who did not provide subsidies to the same firm. The firms primarily use cash (over stock options) to remunerate officials who previously offered preferential treatment.  

Firms benefit from securing officials that deliver on subsidies. Firms that hire officials who provided subsidies before joining the firm receive approximately 26% more government subsidies than do their peer firms even after these officials join the firm. The subsidy value obtained by firms that continue to hire former officials received between 26% and 54% more subsidies than those that do not. By offering formal employment, firms appear to align interests with these officials, acquiring their tangible (e.g., connections, favorable deals) and intangible (e.g., expertise or information) assets.  

Preferential subsidy allocation drives public resource misallocation. The analysis shows that on average, subsidies are allocated to firms with higher-than-average productivity (TFP) in their sector. However, local officials who seek private sector careers are more likely to subsidize less productive firms, reducing the efficiency of public resource allocation. Higher “favorable subsidies” from officials later employed by firms are negatively correlated with the public spending of the prefectural government. A 1% increase in favorable subsidies leads to 0.3% less per capita public spending. Favorable subsidies do not appear to decrease public spending for provincial and county government, where the volume of exchange of favor is lower than in prefectural government.  

Types of subsidies favorably allocated by officials later employed by firms

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The analysis reveals that, each year, firms received subsidies averaging 12 million RMB provided by officials who later joined the firm, accounting for approximately 12% of the median net profit of a firm publicly listed in China between 2007 and 2019. 

A bribery scheme with deferred payment. Opportunities for lucrative private sector positions following government service serve as a strong incentive for public officials to use their discretion over government subsidies to preferentially allocate subsidies, misallocating public resources in the process. Receiving firms benefit and repay these officials not through instant kickbacks, but by hiring them and giving them sizable compensation after the officials leave public office.