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A Principal-agent Theory of the Public Economy and Its Applications to China

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  • Weiying Zhang

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Abstract

This paper is intended to model the principal-agent relationship and its associated monitoring-incentive problems of the public economy. The basic findings are: (1) the degree of publicness and the size of the public economy matter: the monitoring effort of the original principals and the work effort of the ultimate agents decrease with the degree of publicness and the size of the public economy; (2) a corrupt public economy can be a Pareto-improvement over the non-corrupt public economy. The first finding sheds some light upon performance comparison between different public economies (such as between Singapore and China). The second finding explains why all socialist economies are corrupt ones. The paper applies the above results particularly to the Chinese economy. Copyright Kluwer Academic Publishers 1998

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File URL: http://hdl.handle.net/10.1023/A:1003564611629
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Bibliographic Info

Article provided by Springer in its journal Economics of Planning.

Volume (Year): 31 (1998)
Issue (Month): 2 (May)
Pages: 231-251

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Handle: RePEc:kap:ecopln:v:31:y:1998:i:2:p:231-251

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Web page: http://www.springerlink.com/link.asp?id=113294

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Keywords: Chinese economy; corruption; hierarchy; principal-agent theory; public ownership;

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  1. Qian, Yingyi, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 527-44, July.
  2. 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.
  3. Zhang, Weiying, 1997. "Decision rights, residual claim and performance: A theory of how the Chinese state enterprise reform works," China Economic Review, Elsevier, vol. 8(1), pages 67-82.
  4. Michael Keren & David Levhari, 1979. "The Optimum Span of Control in a Pure Hierarchy," Management Science, INFORMS, vol. 25(11), pages 1162-1172, November.
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