Quid Pro Quo? Government-Firm Relationships in China

This paper exploits a quasi-experiment from China to study favors from firms to governments. A tax revenue-sharing rule between central and local governments was announced in October 2001: the higher the local tax revenue in 2001, the higher the local share post-2001. I find that local governments which granted more favors to firms before the reform received more assistance from firms to raise their tax revenue. However, when firms expect that government leaders will soon leave office, the favors granted to firms have no effect on firms' assistance, suggesting that the favor-exchange is enforced by the value of future reciprocity