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Why do Governments Privatize

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Author Info
Loren Brandt
Hongbin Li
Joanne Roberts

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Abstract

The role of township-owned enterprises in the rapid growth of the Chinese economy during reform is widely acknowledged. Beginning in the mid-1990s, however, these firms began to be privatized. Perhaps the most striking feature of this process is that it has not occurred uniformly across townships. This raises the simple question: When and why do government leaders privatize? Drawing on a unique data set we collected in the summers of 1998 and 2000, this paper provides a simple theoretical and empirical investigation into this question. We focus on the effect of bank liquidity and bank objectives in determining the value of the firm in the event of privatization. We consider how bank decisions interact with those of governmental leaders and firm managers and ultimately determine the attractiveness of privatization. We also analyze the conditions under which shutdown might be preferred to privatization as a method to divest of government-owned firms. We find that this simple model of the privatization decision yields insights which can be tested with this unique data set.

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Publisher Info
Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 429.

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Date of creation: 01 Dec 2001
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Handle: RePEc:wdi:papers:2001-429

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Related research
Keywords: privatization; township and village enterprises; financial institutions;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hongbin Li & Scott Rozelle, 2003. "Privatizing Rural China: Insider Privatization, Innovative Contracts, and the Performance of Township Enterprises1," Discussion Papers 00001, Chinese University of Hong Kong, Department of Economics. [Downloadable!]
  2. Chang Chun & Wang Yijiang, 1994. "The Nature of the Township-Village Enterprise," Journal of Comparative Economics, Elsevier, vol. 19(3), pages 434-452, December. [Downloadable!] (restricted)
  3. Clarke, George R.G. & Cull, Robert, 2005. "Bank privatization in Argentina: A model of political constraints and differential outcomes," Journal of Development Economics, Elsevier, vol. 78(1), pages 133-155, October. [Downloadable!] (restricted)
    Other versions:
  4. Weitzman Martin L. & Xu Chenggang, 1994. "Chinese Township-Village Enterprises as Vaguely Defined Cooperatives," Journal of Comparative Economics, Elsevier, vol. 18(2), pages 121-145, April. [Downloadable!] (restricted)
    Other versions:
  5. Repullo, Rafael & Suarez, Javier, 1998. "Monitoring, Liquidation, and Security Design," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(1), pages 163-87.
    Other versions:
  6. Diamond, Douglas W, 1997. "Liquidity, Banks, and Markets," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 928-56, October.
    Other versions:
  7. Albert Park & Loren Brandt & John Giles, 1997. "Giving Credit Where Credit is Due: The Changing Role of Rural Financial Institutions in China," William Davidson Institute Working Papers Series 71, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  8. Brandt, Loren & Li, Hongbin, 2003. "Bank discrimination in transition economies: ideology, information, or incentives?," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 387-413, September. [Downloadable!] (restricted)
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  9. Jiahua Che & Yingyi Qian, 1998. "Insecure Property Rights And Government Ownership Of Firms," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 467-496, May. [Downloadable!] (restricted)
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  10. Li, Hongbin, 2003. "Government's budget constraint, competition, and privatization: evidence from China's rural industry," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 486-502, September. [Downloadable!] (restricted)
  11. Yuanzheng Cao & Yingyi Qian & Barry R. Weingast, 1999. "From federalism, Chinese style to privatization, Chinese style," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 103-131, March. [Downloadable!] (restricted)
  12. Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-46, September. [Downloadable!] (restricted)
  13. Jefferson, Gary H & Rawski, Thomas G, 1994. "Enterprise Reform in Chinese Industry," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 47-70, Spring. [Downloadable!] (restricted)
  14. Jiahua Che & Yingyi Qian, . "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises," Working Papers 97043, Stanford University, Department of Economics. [Downloadable!]
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  15. Hongbin Li & Li-An Zhou, 2003. "Political Turnover and Economic Performance: The Disciplinary Role of Personnel Control in China," Discussion Papers 00002, Chinese University of Hong Kong, Department of Economics. [Downloadable!]
  16. William L. Megginson & Jeffry M. Netter, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June. [Downloadable!] (restricted)
  17. Nandini Gupta & John Ham & Jan Svejnar, 2000. "Priorities and Sequencing in Privatization: Theory and Evidence from the Czech Republic," Econometric Society World Congress 2000 Contributed Papers 1580, Econometric Society. [Downloadable!]
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  18. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November. [Downloadable!] (restricted)
  19. Li, Shaomin & Li, Shuhe & Zhang, Weiying, 2000. "The Road to Capitalism: Competition and Institutional Change in China," Journal of Comparative Economics, Elsevier, vol. 28(2), pages 269-292, June. [Downloadable!] (restricted)
  20. Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993. "Privatizing Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-2), pages 139-192. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David Li & Francis Lui, 2004. "Why Do Governments Dump State Enterprises?Evidence from China," NBER Chapters, in: Governance, Regulation, and Privatization in the Asia-Pacific Region, NBER East Asia Seminar on Economics, Volume 12, pages 211-230 National Bureau of Economic Research, Inc. [Downloadable!]
  2. Fang, Xiangming & Smith, Rodney B.W., 2002. "Barriers To Efficiency And The Privatization Of Township-Village Enterprises," 2002 Annual meeting, July 28-31, Long Beach, CA 19744, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  3. Peter Li, 2009. "The Duality of Crony Corruption in Economic Transition: Toward an Integrated Framework," Journal of Business Ethics, Springer, vol. 85(1), pages 41-55, March. [Downloadable!] (restricted)
  4. Li, Hongbin & Rozelle, Scott, 2001. "Insider Privatization With A Tail: The Buyout Price And Performance Of Privatized Firms In Rural China," Working Papers 11968, University of California, Davis, Department of Agricultural and Resource Economics. [Downloadable!]
  5. Jiahua Che, 2003. "The Life Cycle of Government Ownership," William Davidson Institute Working Papers Series 2003-627, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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