Local protectionism, regional production networks, and spatial allocation of firms in China

Local protectionism disrupts buyer-supplier chains, since it requests local firms to buy the outputs of other local firms as inputs. Hence, it is an important factor for firms' location choices, as buyer-supplier chains affect profitability. I study how local protectionism shapes the spatial allocation of firms through disrupting production networks. Using a spatial regression discontinuity design, I find that local protectionism causally affects firm entry and exit. Favoritism susceptible to corruption by local career-driven leaders is the driver of the effects. A novel spatial quantitative model indicates that eradicating local protectionism enhances welfare, by facilitating interregional transactions