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State-Owned Enterprises, Shirking and Trade Liberalization

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  • Madanmohan Ghosh
  • John Whalley

Abstract

We explore the implications of trade liberalization in economies with State Owned enterprises (SOEs) and shirking. SOEs are modelled as controlled by the members of the enterprise who determine output and effort levels, while facing output prices and wage rates set by government. Enterprise members must collectively meet a budget constraint that the value of sales equals the enterprise wage bill plus an exogenous enterprise commitment to the state budget. Labour can shirk either through low on the job effort (leisure), or through moonlighting to second jobs in the private sector. Three alternative formulations of equilibria in SOE economies are explored, and in these trade liberalization can produce effects opposite from conventional competitive models. In particular, the output of import competing SOEs increases rather than falls, and negative effects on imports can also occur. These models when calibrated to 1995 data for Vietnam also suggest quantitatively much larger impacts from trade liberalization than is the case for comparable conventional competitive models. This is because departures from Pareto optimality in SOE economies can be large and trade liberalization acts to discipline shirking associated with these inefficiencies. The implication we draw from our analysis is that to evaluate policy initiatives, such as trade liberalization, in developing and transition economies without explicitly recognizing the role that SOE's can play may be misleading. This is especially the case where SOEs account for a significant fraction of economic activity and shirking is involved.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7696.

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Date of creation: May 2000
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Publication status: published as Ghosh, Madanmohan & Whalley, John, 2008. "State owned enterprises, shirking and trade liberalization," Economic Modelling, Elsevier, vol. 25(6), pages 1206-1215, November.
Handle: RePEc:nbr:nberwo:7696

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  9. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-62, December.
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Cited by:
  1. Henrik Barslund Fosse & Pascalis Raimondos-Møller, 2011. "Reducing Tariffs according to WTO Accession Rules: The Case of Vietnam," CESifo Working Paper Series 3628, CESifo Group Munich.
  2. John Whalley & Shunming Zhang, 2006. "State-Owned Enterprise Behaviour Responses to Trade Reforms: Some Analytics and Numerical Simulation Results Using Chinese Data," NBER Working Papers 12780, National Bureau of Economic Research, Inc.
  3. Claustra Bajona & Tianshu Chu, 2009. "Data Appendix to "Reforming the State-Owned Enterprises in China: Effects of WTO Accession"," Technical Appendices 06-12, Review of Economic Dynamics.

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