Capital Market Development: China and Asia Seminar Series – Investing with the Government: A Field Experiment in China

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The authors study the demand for government participation in financial markets. Focusing on the venture capital and private equity industry in China, the authors design a non-deceptive field experiment in collaboration with the leading industry organization, through which the authors conduct 1,000 experimental surveys of both capital investors (LPs) and private firms that manage the invested capital by deploying it to high-growth firms (GPs). Each respondent evaluates hypothetical profiles of potential partners, whose characteristics the authors randomize, under the real-stakes incentive that they will be matched with real partners based on their preferences. The authors document that the average GP dislikes government-connected LPs. Consistent with political views of government participation in finance, such dislike is not present for government-owned GPs. Qualitative surveys suggest the presence of political interference in decision-making by LPs with government ties is a leading mechanism why private GPs prefer capital from private LPs. On the other hand, the authors find that the average LP prefers GPs that have a government-connected LP as an investor. The authors combine their experimental estimates with administrative data on actual GP-LP matches, and develop a new two-sided search and matching model to show how government participation shapes market outcomes.

About the Seminar Series

Financial market development goes hand-in-hand with economic growth. The development of China’s capital markets in terms of size, regulations, capability, and efficiency has been impressive. China may now even lead globally in some dimensions, notably e-payments systems. Yet, China’s capital markets are still a work-in-progress facing both generic and unique challenges. Other Asian capital markets have even greater uneven development. Some in advanced Asian economies have acquired globally acclaimed reputation and capabilities while various regulatory and structural weaknesses dwarf others. Corporations and investors have been inclined to arbitrage cross-border regulatory and developmental gaps; so the very uneven status of capital markets across Asia is a policy issue for the governments in the entire region and perhaps globally. Analyzing the positive and negative lessons in the functioning of Asia’s capital markets, and identifying reforms and applications of technology that could further improve Asian capital markets’ allocation efficiency, financial inclusion, and forewarning against reforms that might cause problems can benefit practitioners, policymakers and researchers, and can contribute significantly to overall prosperity.

The ABFER and the University of Chicago’s Becker Friedman Institute China (BFI-China), in collaboration with National University of Singapore (NUS) Business School, Shanghai Advanced Institute of Finance (SAIF), The Chinese University of Hong Kong (CUHK) Department of Economics, CUHK-Shenzhen and Tsinghua University PBC School of Finance (Tsinghua PBCSF), hope to provide a virtual network to benefit researchers, policymakers, and practitioners from Asia and beyond.