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Refinancing and decentralization: Evidence from China

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  • Park, Albert
  • Shen, Minggao

Abstract

Decentralization can complement market liberalization by strengthening incentives of agents to respond to market signals. However, in China banks centralized lending authority following financial reforms in the mid-1990s. We present a new theory of financial decentralization in which centralization provides a credible commitment not to refinance bad projects by reducing available information. Using data from Chinese rural financial institutions, we empirically assess the determinants of decentralization and the likelihood of collateral seizure, strongly confirming the predictions of the refinancing model. We conclude that weak institutional environments may limit the efficiency of financial intermediation despite financial market liberalization.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 66 (2008)
Issue (Month): 3-4 (June)
Pages: 703-730

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Handle: RePEc:eee:jeborg:v:66:y:2008:i:3-4:p:703-730

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Cited by:
  1. Silvia Dominguez-Martinez & Randolph Sloof & Ferdinand von Siemens, 2010. "Monitoring your Friends, not your Foes: Strategic Ignorance and the Delegation of Real Authority," CESifo Working Paper Series 3172, CESifo Group Munich.
  2. Ghazi Zouari, 2011. "Specific knowledge, investment decision and organizational architecture," Working Papers CREGO 1110501, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.

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