Economic Benefits and Political Risks: Effects of Land Price Manipulation in China

Abstract: Using China's land market data during 2012-2013, I document evidence of corruption and its effects on politicians and politically connected firms. I find that firms that have locality-specific political ties paid on average 30% less than firms without such ties. Detailed investigations show that firms' political patrons manage to reduce prices by lowering land reserve prices and restricting competitors during the land auction period. Meanwhile, I find that political patrons' level of corruption has an inverted U-shaped relationship with their promotion incentive, and has a U-shaped relationship with their tenure at current positions. Finally, I conduct an event study to show that politically connected firms experienced an overall 18% abnormal negative returns when their political patrons were disciplined during the current anti-corruption campaign.