Three essays on facets of Chinese economic development: Institutions, industry and tax policies

My dissertation explores three different facets about China: the impact of institutions on individual's social network formation; the tax sensitivity of corporate investment and firms' capital structures; and the effect of a policy shock on firms' performance resulting from intensified inter-jurisdiction competition. In Chapter 1, we study the influence of the communist party on individual's social networks in urban China and, thereby, present a case of socio-political institutions being an important ingredient in social network formation. We present a stylized model of social network accumulation to motivate our estimation equation and contrast it with the previous literature. In our empirical analysis, we adopt a counterfactual framework and estimate the effect of communist party membership on social network investment as an average treatment effect. We find the treatment to be significant. In Chapter 2, we employ a combination of propensity score matching and difference in difference approach on a large manufacturing firm-level dataset to evaluate the impact of the 2004 tax reform on firm performance from the northeast region of China. We make a clear distinction between two levels of treatments placed. We find that firms in both treatments achieved increased in size measured by gross sales, gross output, and total assets. Both treatments show negative effects on employment and profitability. The two treatments have distinct different impacts on labor productivity and firm leverage. The distinctions in leverage suggest firms in two treatment groups face different finical constraints. In Chapter 3, we examine the impact of a special `policy shock' on firms' performance. In the second-tier cities in China, one of the commonly practices for city branding and promoting investment is switching to 8-digit phone numbers, which signals possible agglomeration benefits and other advantages of a location of larger size. Using a large firm-level panel dataset of non-public firms, we test the impact of this `policy shock' - the jurisdictional land-line phone digit upgrades - on firms' financial performance. Identification comes from the longitudinal nature of the data-set that follows individual firms over time. We find evidence that phone upgrade leads to improved performance of the firms.