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Rent Seeking and Government Ownership of Firms: An Application to China's Township-Village Enterprises

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  • Che, Jiahua

Abstract

Using its control of regulated inputs, a government agency extracts rents from a manager who undertakes an investment. Such government rent-seeking activity leads to a typical hold-up problem. Government ownership serves as a second-best commitment mechanism, through which the government agency will restrain itself from the rent-seeking activity and may even offer the manager assistance in the form of tax breaks and subsidies. This mechanism works at a cost, however, as government ownership also compromises ex post managerial incentives and creates distortion in resource allocation. Nevertheless, government ownership Pareto dominates private ownership under certain conditions. These conditions correspond to a host of stylized empirical observations concerning local government-owned firms, i.e., township-village enterprises, during China’s transition to a market economy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 30 (2002)
Issue (Month): 4 (December)
Pages: 787-811

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Handle: RePEc:eee:jcecon:v:30:y:2002:i:4:p:787-811

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Web page: http://www.elsevier.com/locate/inca/622864

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  1. Banerjee, Abhijit V, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1289-1332, November.
  2. Jiahua Che & Yingyi Qian, . "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises," Working Papers 97043, Stanford University, Department of Economics.
  3. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Putterman, Louis, 1997. "On the past and future of china's township and village-owned enterprises," World Development, Elsevier, vol. 25(10), pages 1639-1655, October.
  5. Naughton, Barry, 1994. "Chinese Institutional Innovation and Privatization from Below," American Economic Review, American Economic Association, vol. 84(2), pages 266-70, May.
  6. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  7. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  8. Jiahua Che, 2000. "From the Grabbing Hand to the Helping Hand," William Davidson Institute Working Papers Series 58, William Davidson Institute at the University of Michigan.
  9. Hsiao, Cheng & Nugent, Jeffrey & Perrigne, Isabelle & Qiu, Jicheng, 1998. "Shares versus Residual Claimant Contracts: The Case of Chinese TVEs," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 317-337, June.
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  12. Tian, Guoqiang, 2000. "Property Rights and the Nature of Chinese Collective Enterprises," Journal of Comparative Economics, Elsevier, vol. 28(2), pages 247-268, June.
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Cited by:
  1. Alexandra Reppegather & Manuela Troschke, 2006. "Graduelle Transformation von Wirtschaftsordnungen: Ein Vergleich der Reformstrategien Chinas und Usbekistans," Working Papers 260, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  2. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
  3. Ahrens, Joachim & Jünemann, Patrick, 2010. "Transitional institutions, institutional complementarities and economic performance in China: A 'Varieties of Capitalism' approach," Discourses in Social Market Economy 2010-11, OrdnungsPolitisches Portal (OPO).
  4. Jiahua Che, 2003. "The Life Cycle of Government Ownership," William Davidson Institute Working Papers Series 2003-627, William Davidson Institute at the University of Michigan.
  5. Perotti, Enrico, 2004. "State ownership - a residual role?," Policy Research Working Paper Series 3407, The World Bank.
  6. Boudewijn Bouckaert, 2007. "Bureaupreneurs in China: we did it our way," European Journal of Law and Economics, Springer, vol. 23(2), pages 169-195, April.
  7. Ito, Junichi, 2006. "Economic and institutional reform packages and their impact on productivity: A case study of Chinese township and village enterprises," Journal of Comparative Economics, Elsevier, vol. 34(1), pages 167-190, March.
  8. Faqin Lin & Can Huang & Xiaobo He & Chao Zhang, 2013. "Do more highly educated entrepreneurs matter?," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 27(2), pages 104-116, November.

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