Political uncertainty and revenue sharing in international contracting

Abstract

This study investigates a critical source of political uncertainty for foreign investors in a centralised political system: leadership turnover within local governments. Our stylised model suggests that risk-averse foreign investors, faced with this uncertainty, tend to offer a larger revenue share to their local partners in international joint ventures (IJVs). This incentivises local officials to provide the necessary authorisations and public inputs for IJVs. Using a unique Chinese dataset that links city-level leadership changes with firm-level incentive structures, our empirical analysis provides robust evidence supporting this framework.