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We use a Chinese firm‐director panel dataset to examine the matching of heterogeneous firms and politicians. On the basis of 36,308 detailed biographies, we identify individuals who previously held bureaucratic positions and classify the rank of each position in the Chinese political hierarchy. Using this direct measure of political capital, we examine how firms with heterogeneous productivity match politicians with different political strength. Our results indicate a positive assortative matching in the political capital market. More productive firms are paired with more powerful politicians. Furthermore, the preference for political capital relative to conventional human capital increases in firms' dependence on external financing and the inefficiency of local governments. Conditional on the endogenous matching, new hires with political capital receive more compensation than their co‐workers in the same cohort. The marginal effect of a one‐step rise on the political ladder significantly exceeds the marginal effect of raising education attainment from, for example, high school to college. (JEL D21, D73, J24, J31, O12)
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Document Type: Research Article

Affiliations: Department of Economics and Elliott School of International Affairs, George Washington University, 2115 G Street, NW, #367, NW, Washington, DC 20052. Phone 202-994-0192, Fax: 202-994-6147

Publication date: April 1, 2013

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