The allocation of entrepreneurial efforts in a rent-seeking society: Evidence from China

•There are four types of entrepreneurial efforts in a rent-seeking society.•Entrepreneurs pursue rent-seeking and reject rent-extraction against politicians.•Ordinary entrepreneurs would desire better institutional environment.•Entrepreneurs prefer political connections if institutional improvement is unavailable.•China is trapped in a rent-seeking society. This paper considers four types of entrepreneurial efforts: productive activities, aggressive rent seeking, defense against rent extraction, and leisure. It examines how entrepreneurs allocate efforts when facing dual-dealing relationships with politicians in a rent-seeking society: entrepreneurs not only pursue additional benefits through rent seeking, but also try to avoid extortions by politicians. Using unique city-level and firm-level data across China, we demonstrate that Chinese entrepreneurs survive in a twisted world: ordinary entrepreneurs would desire better institutional environment, but if institutional improvement is not available, they would prefer political connections which are often preoccupied by special interest groups and/or large-sized firms.