Status Incentives and Corporate Giving: Evidence From China's Political Reform On Private Enterprises

• Published date: 01 December 2017
• Date: 01 December 2017
• Author: Zhao Chen,Jipeng Zhang
• DOI: http://doi.org/10.1111/1468-0106.12134

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STATUS INCENTIVES AND CORPORATE GIVING:

EVIDENCE FROM CHINA’S POLITICAL REFORM ON

PRIVATE ENTERPRISES

ZHAO CHEN Fudan University

JIPENG ZHANG*Southwestern University of Finance and Economics

Abstract. In this paper, we estimate the effect of status incentives on charitable giving by exploiting a

natural experiment during China’s political reform in 2002 that significantly improved the status of

private entrepreneurs and their enterprises. We find that exogenous changes in social, political and

economic status of private entrepreneurs led to a significant increase in the corporate giving of their

privately owned firms. The findings are robust when we use different samples of the data and when

we control for a large set of entrepreneurs and firm characteristics in the regression analysis.

1. INTRODUCTION

Corporate giving is the major financial resource for China’s philanthropy sector.

In 2011, corporate giving accounted for approximately 58% of the total giving

amount.1Understanding the determinants of corporate giving is important

not only for the development of China’s philanthropy sector, but also for the

promotion of corporate social responsibility. The dominance of co rporate giv-

ing in China itself is an interesting phenomenon, considering that corporate

giving in the United States plays only a minimal role. According to the Giving

USA Foundation, in 2013, the largest source of charitable giving came from

individuals, at US$241.32bn, or 72% of total giving, followed by foundations

(US$50.28bn or 15%) and bequests (US$26.81 billion or 8%), whereas corpo-

rate giving reached only US$16.76bn and accounted for 5% of total giving.

In this paper, we study the relationship between entrepreneurs’status incen-

tives and their firms’charitable giving. Status incentive plays an essential role

in the economic analysis of charitable giving (Frey and Meier, 2004).2The re-

lationship between status incentive and charitable giving, however, is compli-

cated in terms of causal effects (Bracha et al., 2009). On the one hand, higher

social status induces people to give more because of intrinsic motives like the

sense of responsibility or the external social pressure to be a role model. On

*Address for Correspondence: Research Institute of Economics and Management, Southwestern Uni-

versity of Finance and Economics. E-mail: jpzhang@swufe.edu.cn. We thank Xiaojia Bao, Ying

Fang, Shihe Fu, Cheryl Long, Yun Wang, Yilan Xu, Miaoliang Ye and the seminar participants

at the Workshop on Contemporary China at Nanyang Technological University, Fudan University,

Xiamen University and Zhejiang University for many helpful comments, and Wei Huang for excel-

lent research assistance. Financial support from the Ministry of Education of China (13JJD790007)

and Nanyang Technological University is gratefully acknowledged.

1The data is from the China charity information website: www.chrity.gov.cn.

2Status incentives are also important for economic studies, such as mechanism design and conspic-

uous consumption (Hopkins and Kornienko, 2004; Moldovanu et al. 2007; Moldovanu et al. 2007;

Ghatak and Besley, 2008; Heffetz and Frank, 2011).

Pacific Economic Review,••:•• (2016) pp. 1–20

doi: 10.1111/1468-0106.12134

© 2016 John Wiley & Sons Australia, Ltd

© 2016 John Wiley & Sons Australia, Ltd

Pacific Economic Review

, 22: 5 (2017) pp. 841–860

doi: 10.1111/1468-0106.12134

the other hand, people might give more in order to gain higher social status or to

signal their wealth and prestige (Vesterlund, 2003). Hence, the causal relation-

ship between status incentive and charitable giving can go either way. In this pa-

per, we evaluate the effect of status change on corporate giving, using unique

survey data that include detailed social and economic information on private en-

trepreneurs and their firms. This data set also collects information on status

measures and corporate giving during China’s economic and political reform be-

tween 1996 and 2009.

To estimate the causal effect of status change on corporate giving, we exploit

a natural experiment (China’s political reform of its private sector around 2002)

that led to a significant status improvement of private entrepreneurs and their

firms. In China, the political status of private entrepreneurs changed gradually

after Deng Xiaoping’s‘Southern Tour’in 1992, which initiated a high wave of

political and economic reform.3The most significant status change started from

1 July 2001, when Zemin Jiang, the general secretary of the Standing Committee

of the China’s Communist Party (CCP), called for political reform to make ‘ad-

vanced productive elements’part of the working class, in a speech on ‘advanced

productive forces, the progressive course of China’s culture, and the fundamen-

tal interests of the people’. The purpose of the ‘Three Represents’is to legitimize

the entry of private business owners into the CCP. During this period, the status

of private entrepreneurs was greatly elevated, and private property rights were

recognized officially in a constitutional format later.4

Using data from a unique survey on China’s private entrepreneurs and their

firms from 1996 to 2009, we find that, after the political reform in 2002, there

was a significant increase in the political, social and economic status of private

entrepreneurs. Exploring this exogenous change in the various status measures

of those private entrepreneurs, we find that the improvement of their status

has a significantly positive effect on corporate giving from the firms owned by

these entrepreneurs. According to our estimates, a one unit (10%) increase in so-

cial, economic and political status results in a 15, 43 and 21% increase, respec-

tively, in the probability of giving. At the intensive margin, a one unit (10%)

increase in social, economic and political status leads, respectively, to 13 000,

74 000 and 27 000 (in Chinese yuan) more in corporate giving.

The findings are robust even after controlling for a large set of entrepreneurs

and firm characteristics. Similar conclusions were reached for the estimations

using both the 2001 and 2003 sample and the full sample. Additional evidence

suggests that the positive effect of status improvement on corporate giving

largely comes from the social responsibility and reciprocity considerations asso-

ciated with better recognition of the entrepreneurs’status.

3The first major event occurred in 1992–1993, when private entrepreneurs for the first time could be

recommended as members of China’s Political Consultative Conference. The second is the recogni-

tion of the private sector as an important component of the ‘socialist market economy’in 1997, at

the 15th National Congress of the China’s Communist Party.

4On 14 March 2004, the Constitution of the People’s Republic of China was amended to include

guarantees that ‘legally obtained private property of the citizens shall not be violated’. This is a sig-

nificant change for the protection of private ownership.

Z. CHEN AND J. ZHANG2

© 2016 John Wiley & Sons Australia, Ltd

© 2016 John Wiley & Sons Australia, Ltd

Z. CHEN AND J. ZHANG

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