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Resource misallocation in China: Biased subsidies versus credit discrimination

Author

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  • Weng, Liying
  • Xu, Changsheng
  • Yi, Ming

Abstract

This paper develops a two-sector growth model incorporating the state-owned and private-owned sectors and introduces biased subsidies and credit discrimination to explore how the effects of these two important policy distortions differ and interact. Based on the calibration of the Chinese economy, our primary findings are as follows. (1) Subsidy policies favoring state-owned enterprises improve the efficiency of resource allocation within each sector, whereas credit policies discriminating against private-owned enterprises reduce the efficiency of resource allocation within each sector. (2) Although both biased subsidies and credit discrimination lead to resource misallocation between sectors and ultimately harm total factor productivity (TFP), biased subsidies have a greater impact on intersectoral resource misallocation, limiting the TFP gains from mitigating credit discrimination. The policy implication is that mitigating distortions caused by biased subsidies should be prioritized over mitigating distortions caused by credit discrimination.

Suggested Citation

  • Weng, Liying & Xu, Changsheng & Yi, Ming, 2024. "Resource misallocation in China: Biased subsidies versus credit discrimination," Economic Modelling, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:ecmode:v:134:y:2024:i:c:s0264999324000555
    DOI: 10.1016/j.econmod.2024.106699
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    More about this item

    Keywords

    Policy distortions; Biased subsidies; Credit discrimination; Resource allocation efficiency; Total factor productivity;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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