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Connect to invest: Hometown ties, intercity capital flows, and allocative efficiency in China

Author

Listed:
  • Shi, Xiangyu
  • Liu, Yu

Abstract

This paper establishes a novel argument that social networks among local politicians reduce spatial frictions of corporate investment. We leverage the replacement of city officials and the resulting exogenous variations of hometown ties among city party secretaries to examine their impact on intercity capital flows in China. The results provide strong evidence that such connections significantly enhance capital flows between cities. These social bonds appear to effectively lower entry barriers for businesses and offer sustained support to connected firms without negatively impacting unconnected ones. Our research indicates that the increase in hometown-related investments does not displace non-hometown-related investments.

Suggested Citation

  • Shi, Xiangyu & Liu, Yu, 2024. "Connect to invest: Hometown ties, intercity capital flows, and allocative efficiency in China," MPRA Paper 121412, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:121412
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    File URL: https://mpra.ub.uni-muenchen.de/121412/1/MPRA_paper_121412.pdf
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    More about this item

    Keywords

    hometown ties; capital flow; transaction costs; rent seeking; economic growth;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • G1 - Financial Economics - - General Financial Markets
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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