Social Network, Career Incentive and Interregional Trade in China

Abstract: Contrary to the large number of studies that examine the role of political leaders in economic growth and international trade, less attention has been paid to their impact on domestic trade, particularly in places where general elections are absent. This paper aims to fill in this gap by focusing on how the career incentives and social networks of local leaders influence interregional trade in China. Results using data on interregional railway cargo from 2004 to 2015 contrast the common understanding that career incentives mobilize the local leaders to implement policies beneficial to local economic growth. Rather, promotion tournament between local leaders actually becomes a new type of trade cost and decreases trade between competitors. However, social networks among local leaders instead help to reduce trade costs and increase the trade volumes between connected regions. This effect is induced by both higher social trust and political in-group favoritism. Furthermore, study of the content of articles published in government-owned newspapers reveals that connection and competition between local leaders also affect the number of articles on interregional economic activities, providing direct evidence of the efforts of local leaders to push the interregional economic cooperation with different regions. Finally, we find that local leaders with greater career concerns are more likely to put into place import restrictions to help local firms grow.