SOE preference and credit misallocation: A model and some evidence from China

- We endogenize the credit misallocation by introducing government's SOE preference.
- The model predicts that, credit misallocation is heavier in regions with high SOE share.
- Results show that the degree of financing difficulty increases with regional SOE share.

We endogenize credit misallocation by introducing the government's preference. The local government determines the credit subsidy to SOEs after a trade-off between SOEs' profits and local aggregate outputs. Credit misallocation is more severe in regions where SOE share is high.