Government-decentralized power: Measurement and effects

Using tools from computational linguistics, we construct a new measure of government-decentralized power faced by Chinese firms: the diversity between central and local government work reports. Using our measure, we document that government-decentralized power has an inverse U-shaped impact on investment efficiency (a U-shaped impact on investment inefficiency). Currently, government-decentralized power is below its optimal level. The underlying mechanisms are yardstick competition among local governments and the election effect of political officials, which dominate the preference-matching effect in support of decentralization. Furthermore, local governments present broadly positive sentiment in their reports. This strengthens the negative impact of inadequate government-decentralized power.