Investing with the Government: A Field Experiment in China

This paper studies 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. We 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, we find that the average LP prefers GPs that have a government-connected LP as an investor. We 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.