Anticorruption, Government Subsidies, and Innovation: Evidence from China

Abstract

We leverage an exogenous shock—the crackdown on corrupt Chinese officials beginning in 2012—and examine how the allocation of research subsidies and innovative outcomes were affected. We argue that the staggered removal of provincial heads on corruption charges during China’s anticorruption campaign and the unanticipated departures of local government officials responsible for innovation programs led to plausibly exogenous reductions in corruption. After both events, the allocation of subsidies became more sensitive to firm merit than to corruption and subsidies became more strongly associated with future innovation. Anticorruption efforts and officials’ career incentives improved the efficacy of subsidy programs. This paper was accepted by Toby Stuart, entrepreneurship and innovation. Funding: This work was supported by the Harvard Business School, Toulouse Network on Information Technology, Major projects of the National Social Fund of China [Project 22ZDA047], and National Natural Science Foundation of China [Grants 71790601, 71722012]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4611 .