"Investing with the Government: A Field Experiment in China"

Abstract:

We study the demand for government participation in financial markets. Focusing on the venture capital and private equity industry in China, we design a non-deceptive field experiment in collaboration with the leading industry organization, through which we conduct 1,000 experimental surveys of both sides of the market: the capital investors (LPs) and the private firms that manage the invested capital by deploying it to high-growth firms (GPs). Our respondents together account for nearly $1 trillion in assets under management. Each respondent evaluates hypothetical profiles of potential partners, whose characteristics we randomize, under the real-stakes incentive that they will be matched with and introduced to real partners based on their preferences. We document that the aver- age GP dislikes government-connected LPs. Consistent with political views of government participation in finance, such dislike is not present for government-owned GPs. To further unpack channels, we conduct additional large-scale surveys, which suggest the presence of political interference in decision-making, and the presence of bureaucrats rather than in- vestment professionals in the management of government LPs, to be leading mechanisms why private GPs prefer capital from private LPs. On the other hand, we find that the average LP prefers GPs that have a government-connected LP as an investor. To illustrate the importance of accounting for demand for different sources of capital, we first establish two stylized facts using administrative data: government LPs are more likely to match with government-owned GPs, and government-owned GPs have lower returns. We then quantify the equilibrium impact of government participation on market outcomes using a two-sided search and matching model and conduct several policy counterfactuals