"political Connections in China's Market Economy"

Abstract: The paper applies a transaction-focused institutional analysis to compare the value of political connections in different types of economic transactions across a broad spectrum of distinct markets. Our analysis is based on a large-scale national survey conducted by the World Bank in 2003 covering 2400 firms in 18 municipalities in China. Our results show that the value of political capital is associated with the institutional domain of markets in which agents use political connections to secure advantages. Only in state-dominated markets does political capital confer to the firm competitive advantages. In this sense, the value of political connections in China does not differ much from patterns observable in established market economies. We interpret this as evidence suggesting China may have experienced a tipping point in its transition to a market economy around the turn of the new century.