Strategic interaction in political competition: Evidence from spatial effects across Chinese cities

Promotion of local leaders in China is decided by their upper-level governments which evaluate their performance based largely on local economic growth. Such a promotion scheme leads to tournament competition among local government leaders of the same level. We test the hypothesis of tournament competition by studying the spatial effects across Chinese prefectural-level cities. Employing spatial econometrics tools, we document a strong spatial effect for city-level total investment which fuels short-term economic growth. This spatial effect is shown to occur only for cities within the same province, but not for neighboring cities located in different provinces. We also find that within the same province, the spatial effect mainly exists for cities with similar economic ranking but not for cities that are geographically proximate. The spatial effect tends to diminish for city leaders who are close to the end of their political careers. These findings suggest that the spatial effect for investment is driven by strategic interactions among political rivals in tournament competition. We rule out alternative factors, such as economic spillovers and tax competition, as the key drivers of the observed spatial effect. •We test the strategic interaction among city leaders in China by studying the spatial effects.•The spatial effect occurs only for cities within the same province.•The spatial effect exists for cities with similar GDP ranking but not for geographical neighbors.•The spatial effect is weaker for city leaders who are nearing the end of their political careers.