"Information Discovery in a Hybrid Economy"

Abstract: We analyze how state interventions impact information discovery in China’s hybrid economy. In our model, a local government makes public investment decisions based on a combination of its policy agenda and a market signal about economic fundamentals. Private firms, limited in their capacity to process information, must choose between focusing on the fundamental and the government’s policy agenda. We find that a moderate governmental response to its agenda leads firms to prioritize information about the fundamental, which enhances market-based information discovery that benefits both government and firm decision-making. In contrast, an intense government response may divert firms’ attention exclusively towards deciphering the government’s agenda. The crux of this dynamic lies in the dual accountability of the local governor, who must balance the central authority’s performance evaluation against the need to uphold household welfare. These dual roles shape the governor’s policy choices, ultimately influencing the efficacy of the market’s information discovery.

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