The political economy of private firms in China

Abstract

The sweeping change in political economy associated with the spectacular growth of the private sector in China is not much studied in economics literature. This paper fills in this gap. The central subject of this paper is the political economy nature of the Chinese private sector and of the CPC. Empirically, we examine the dynamics of rent creation from the party membership and other political connections when the regime is changed from anti-capitalistic to pro-capitalistic. Endogeneity problems are addressed. We identify the causality of rents and private entrepreneurs’ political connections, and explore the implications of these political elites’ rents for social welfare in terms of productivity.