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Why do Governments Privatize

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  • Loren Brandt
  • Hongbin Li
  • Joanne Roberts

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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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 429.

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

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

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References

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  1. Nandini Gupta & John C. Ham & Jan Svejnar, 2000. "Priorities and Sequencing in Privatization: Theory and Evidence from the Czech Republic," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 323, William Davidson Institute at the University of Michigan.
  2. Hongbin Li & Scott Rozelle, 2003. "Privatizing Rural China: Insider Privatization, Innovative Contracts, and the Performance of Township Enterprises1," Discussion Papers, Chinese University of Hong Kong, Department of Economics 00001, Chinese University of Hong Kong, Department of Economics.
  3. Hongbin Li & Li-An Zhou, 2003. "Political Turnover and Economic Performance: The Disciplinary Role of Personnel Control in China," Discussion Papers, Chinese University of Hong Kong, Department of Economics 00002, Chinese University of Hong Kong, Department of Economics.
  4. Jiahua Che & Yingyi Qian, 1998. "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 59, William Davidson Institute at the University of Michigan.
  5. 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.
  6. 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.
  7. Jiahua Che & Yingyi Qian, 1998. "Insecure Property Rights And Government Ownership Of Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(2), pages 467-496, May.
  8. Repullo, Rafael & Suarez, Javier, 1998. "Monitoring, Liquidation, and Security Design," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(1), pages 163-87.
  9. Yuanzheng Cao & Yingyi Qian & Barry R. Weingast, 1997. "From Federalism, Chinese Style to Privatization, Chinese style," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 126, William Davidson Institute at the University of Michigan.
  10. M Weitzman & Cheng-Gang Xu, 1993. "Chinese township village enterprises as vaguely defined cooperations," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3754, London School of Economics and Political Science, LSE Library.
  11. Chang Chun & Wang Yijiang, 1994. "The Nature of the Township-Village Enterprise," Journal of Comparative Economics, Elsevier, vol. 19(3), pages 434-452, December.
  12. Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993. "Privatizing Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 139-192.
  13. Clarke, George R. G. & Cull, Robert, 2001. "Bank privatization in Argentina : a model of political constraints and differential outcomes," Policy Research Working Paper Series 2633, The World Bank.
  14. Douglas W. Diamond, . "Liquidity, Banks and Markets," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 326, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  15. 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, William Davidson Institute at the University of Michigan 71, William Davidson Institute at the University of Michigan.
  16. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(2), pages 321-389, June.
  17. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 995-1025, November.
  18. 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.
  19. Gary H. Jefferson & Thomas G. Rawski, 1994. "Enterprise Reform in Chinese Industry," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(2), pages 47-70, Spring.
  20. Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1113-46, September.
  21. Chen, Hongyi & Rozelle, Scott, 1999. "Leaders, managers, and the organization of township and village enterprises in China," Journal of Development Economics, Elsevier, Elsevier, vol. 60(2), pages 529-557, December.
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Citations

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Cited by:
  1. Jiahua Che, 2003. "The Life Cycle of Government Ownership," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 2003-627, William Davidson Institute at the University of Michigan.
  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, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 19744, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Minggao Shen & Jikun Huang & Linxiu Zhang & Scott Rozelle, 2010. "Financial reform and transition in China: a study of the evolution of banks in rural China," Agricultural Finance Review, Emerald Group Publishing, Emerald Group Publishing, vol. 70(3), pages 305-332, November.
  4. Li, Hongbin & Rozelle, Scott, 2001. "Insider Privatization With A Tail: The Buyout Price And Performance Of Privatized Firms In Rural China," Working Papers, University of California, Davis, Department of Agricultural and Resource Economics 11968, University of California, Davis, Department of Agricultural and Resource Economics.
  5. Peter Li, 2009. "The Duality of Crony Corruption in Economic Transition: Toward an Integrated Framework," Journal of Business Ethics, Springer, Springer, vol. 85(1), pages 41-55, March.
  6. David Li & Francis Lui, 2004. "Why Do Governments Dump State Enterprises?Evidence from China," NBER Chapters, National Bureau of Economic Research, Inc, 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.

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