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Insecure Property rights and Government Ownership of Firms

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  • Jiahua Che
  • Yingyi Qian

Abstract

China's remarkable economic growth occurred despite (1) the lack of rule of law to secure property rights against state encroachment; and (2) government ownership of most new and successful non-state firms. We develop a theory of ownership under state predation that incorporates these two considerations. In our theory, "private ownership" leads to excessive revenue hiding and "state ownership" fails to provide incentives for managers and local governments in a credible way. In contrast, "local government ownership" integrates local government activities and business activities together, which may not only provide incentives for local governments, but also involves less revenue hiding from the local government and less predation from the state. Furthermore, ownership diversity across localities and within a locality is possible. Our theory is consistent with empirical evidence from China. We thus interpret local government ownership as an organizational response to imperfect state institutions.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 51.

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Length: pages
Date of creation: 01 Mar 1997
Date of revision:
Handle: RePEc:wdi:papers:1997-52

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  1. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1996. "The Proper Scope of Government: Theory and an Application to Prisons," NBER Working Papers 5744, National Bureau of Economic Research, Inc.
  2. Schmidt, Klaus M., 1996. "The costs and benefits of privatization: An incomplete contracts approach," Munich Reprints in Economics 19773, University of Munich, Department of Economics.
  3. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  4. Hart, Oliver D, 1988. "Incomplete Contracts and the Theory of the Firm," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 119-39, Spring.
  5. Che, Jiahua & Qian, Yingyi, 1998. "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(1), pages 1-23, April.
  6. Yingyi Qian, 1996. "Enterprise reform in China: agency problems and political control," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(2), pages 427-447, October.
  7. Schmidt, Klaus M, 1996. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 1-24, April.
  8. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  9. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  10. Greif, Avner & Milgrom, Paul & Weingast, Barry R, 1994. "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 745-76, August.
  11. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
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