The microfoundations of mixed system of planning and markets: some theoretical considerations and an empirical analysis of the Chinese agriculture

This study resulted in construction an econometric model for the Chinese agriculture. The model reflects the current Chinese mixed planning and market system. Related policy variables are directly included in objective function for the representative producer. In the mixed system, marginal decisions of producers are affected by state prices only if market price is uncertain. If market price is known, marginal decision rules much like those in market economies are directly applicable;Output supply and input demand equations for risk averse producers were derived from a specific utility function and a normalized quadratic profit function. The complete model includes seven outputs (grain, protein feed, other food from crop, nonfood agricultural products, bovine meat, dairy products, and other meat), two variable inputs (fertilizer and feed), two fixed inputs (land and livestock inventory), two policy variables (state grain price and state grain quota), and one time variable to reflect technical change;The two submodels for the dual system, crops and livestock, were separately estimated using annual data, 1978 to 1985. Full information maximum likelihood methods were used to estimate the system while maintaining the theoretical restrictions following from the optimal process behavior. The elasticity estimates were plausible. Model validation statistics implies satisfactory performance in the sample period for all endogenous variables;The model was used to analyze policy scenarios for the state purchase price and the state purchase quota of grain for years from 1978 to 1988. Two policy conclusions were suggested by the empirical results. First, the government should increase the state price of grain and decrease the state quota of grain if grain production is a high priority for the Chinese agricultural development. Alternatively, if the government wishes to stimulate production of other food and nonfood agricultural products, then a decrease in the state price and an increase in the state quota of grain should be adopted. Second, if the free market is treated as a residual in the state planning process, unintended price variations may have significant impacts on producer resource allocation decisions and incomes. Therefore, it is important not to ignore the free market in mixed systems, as perhaps has been the case for central planners in China.