The Role of Government in Firm Outcomes

Abstract

Using a unique setting in China, where the geographic distance between collective firms and local governments is highly persistent because of legal restrictions on land ownership and mobility, we investigate the role of government involvement in small firms. In our analysis of survey responses, we find that weaker government involvement, measured by greater distance from government, is associated with higher firm autonomy and reduced taxes, protectionism, and anticompetitive behavior. In our analysis of firm-level financial data, we find that distant firms have better operating performance, higher growth, and higher entry rates. We find similar results around exogenous government office relocations.