Corruption and the Allocation of Subsidies in China: The Role of Hometown Preference

Can anti-corruption enforcement improve allocative efficiency when political connections distort industrial policy? Exploiting China's 2013 anti-corruption inspections as a plausibly exogenous shock, I show that enforcement reduced subsidies to hometown-connected firms, with effects concentrated on opaquely described allocations while transparent subsidies remained unaffected—revealing that politicians curtail corrupt rather than legitimate transfers when monitoring intensifies. Reductions operate primarily through behavioral change among continuing politicians, as hometown favoritism shifts from career asset to career liability, disrupting clientelistic equilibria. As resources shift from politically connected to more productive firms, regional productivity increases, with gains concentrated among smaller enterprises that had been crowded out by larger firms in politicians' hometowns. These findings demonstrate how strengthened enforcement can restore competitive dynamics by disrupting the quid pro quo arrangements between politicians and firms that generate substantial economic misallocation.