How can principals incentivize agents’ efforts while maintaining personnel flexibility? We show that creating a "promotion club" solves a large part of the problem: the principal selects, from n agents, m top-performing agents into a club, and then promotes one from within this club based on the principal's idiosyncratic preferences ("mindset"). Intuitively, m=1 indicates a tournament, and m=n, cronyism. A proper (m>1) promotion club outperforms tournament when there are many homogenous agents, and when there are strong intra-crony competitions among heterogeneous agents. We use promotion data from Chinese governments at different levels to validate the model and test its predictions.
“Running out of Steam? Political Terms, Officials’ Incentives, and FDI Inflow in China” (with Shuo Chen, Xiaowei Rose Luo, and Danqing Wang), 2019, submitted.
This study examines a new source of the state’s heterogeneous influences on business activities. We propose how a core feature of the career ladder in state bureaucracy, political terms, influences officials’ incentives and in turn the implementation of state’s economic goals. We argue that, given the mandatory retirement age, political leaders in their first term perceive better chances of promotion and hence have stronger incentives to work towards advancement than those in their continuing terms. We tested this argument by examining Chinese city leaders and FDI inflows in their cities from 2003 to 2010, where attracting FDI was a major state objective and performance target for political leaders. Results show that first term leaders attracted more FDI inflows than continuing leaders, and that this effect was weakened when leaders were close to retirement or the city was ranked in the middle of the tournament competition for officials’ promotion. This study contributes to the literature on the role of the state in businesses by shedding light on a new structural source of heterogeneous state influence. It also extends the Weberian state literature by revealing an unintended consequence of the political term structure for officials’ incentives, and offers a political account for FDI location choice.
“Chasing or Cheating? Theory and Evidence on the Reliability of China’s GDP” (with Shuo Chen, and Xue Qiao), 2019, under review.
China’s GDP has been questioned a lot for its reliability. This paper enquires how local officials’ promotion incentive could lead to data manipulation that contributes to GDP’s unreliability. Using satellite nightlight data to estimate the “true” GDP and manipulated GDP, we find that both real (chasing) effort and cheating effort are higher in counties with officials who are in the first term of their tenure than counties with officials who are in the second term, where the former expects a higher promotion chance than the latter. Furthermore, cheating mainly comes form by officials who are under weaker accountability, have more local information advantage, and face lower opportunity costs. These results are consistent with the model predictions. Moreover, the results suggest that the praised merit-based promotion system in China may inadvertently aggravate information distortion problem.
“Gone with The Wind? Wind Directions, Power Plants and Public Health in China” (with Shuo Chen, Yiran Li, and Guang Shi), 2019, under review.
Based on a nationwide representative county-level dataset from China, this paper empirically examines the spillover effects of air pollution from neighboring coal-fired power plants on local mortality rates due to cardiovascular and respiratory diseases. We combine data on power plants’ industrial output with information on wind direction and speed to proxy for air pollution, and find that air pollution from neighboring power plants indeed has significant negative effects on local public health. The resulting treatment costs are also enormous. Our findings shed light on the necessity of intergovernmental cooperation in environmental governance.