Investing with the Government : A Field Experiment in China

We study the demand for government participation in the venture capital and private equity market 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 (GPs) that manage the invested capital by deploying it to high-growth companies. Our respondents together account for nearly $1 trillion in assets under management. Each respondent evaluates hypothetical profiles of potential investment partners, whose characteristics we randomize, under the real-stakes incentive that they will be introduced to real partners matching their preferences. We document that the average GP dislikes LPs with government ties, indicating that the benefits of political connections are small compared to the cons of having the government as an investor. We show that such dislike is not present for government-owned GPs. Additional surveys of our respondents suggest interference in decision-making is a leading mechanism why government capital is unattractive to private firms. On the other hand, we find that the average LP prefers GPs that have a government-related LP as an investor. Through a model of two-sided search, we combine our experimental estimates with administrative data, discuss the equilibrium effects of government participation, and conduct simple policy counterfactuals