Private Returns to Public Investment: Political Career Incentives and Infrastructure Investment in China

Why do politicians who have short tenure expectations have incentives to invest in long-term infrastructure projects? This mismatch between politicians' short tenures and the long-term needed for infrastructure projects to come to fruition is generally expected to result in underinvestment in critical infrastructure. However, recent data show that China makes massive investments in large-scale, long-term transportation projects. By proposing a political exchange model, we demonstrate a fundamental synergy between the incentives of short-term mayors and of provincial leaders that is realized as a result of subway projects. With both a difference-in-differences design and a fuzzy regression discontinuity design, we show that subway projects significantly increase the promotion chances of city mayors. Additional tests also confirm the mechanism of our theory. Mayors who obtain subway projects deliver economic benefits to provincial leaders. The provincial politicians' prospects of promotion are significantly improved thanks to these economic returns.