China's government controlled firms face two conflict tasks: For one thing, government should credibly delegate efficiency to firms to make them competitive. For the other, the government also needs to control the firms to achieve their political goals. We suggest one way in which the China's government solves this conflict tasks by building pyramidal business groups in which they delegate authority while simultaneously creating vertical correlations to maintain control. Further, we theorize

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... t higher levels of government are more likely to pursue this strategy. Results of quantitative analysis of China's government controlled business groups generally support our expectations.