Events

Mr. Justin Hong

Subjective beliefs– many of which are non-factual or false– influence human decision-making, potentially including key individuals that wield considerable power. This paper documents for the first time the macro-level impact of leaders’ non-factual beliefs, exploiting prominent Chinese traditional beliefs that allow us to link quasi-random, leader-specific spatial biases to regional development within cities. We find that municipal zones perceived as unfavorable to mayors (i.e., subject to mayors’ over pessimism) have an average 2 percent lower GDP compared to other zones. Exploiting mayoral reports and administrative micro-level data, we show reduced policy support and public investment as the key drivers. Downstream changes in firms and house
holds further amplify the loss, with a 6% decrease in firm entry, a 4% reduction in the productivity of remaining firms, and a small population decline. Our back-of-the envelope calculation suggests such non-factual beliefs of Chinese mayors are associated with at least a 0.1% annual GDP loss over the past two decades. Overall, our findings highlight subjective beliefs as an important determinant of leader performance that matters for economic development.