Pro-growth inefficiency: Rents and moral hazard in infrastructure contests in China

We study contests for promotion of local government leaders orchestrated by the central government in China. The contests rewarded regional economic success. The probability of promotion increased with regional infrastructure investment but we find negative returns from infrastructure. We find feedback between corruption and investment in infrastructure. There was moral hazard – successful local government leaders who were promoted to higher level positions in the government and Party hierarchical structure left behind regional local governments mired in debt or bankruptcy because of debt financing of infrastructure investment that was used to win the center-orchestrated contests. Our study makes a contribution to contest theory by providing an empirical study for rent-seeking contests. •We investigate the incentives behind overinvestment in infrastructure in China.•Two driving forces are identified: desires for promotion and corruption rents.•Infrastructure investment is associated with local government leader's promotion.•Demand of more corruption rents increases further investments in infrastructure.