A Refinancing Model of Decentralization with Empirical Evidence from China

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A Refinancing Model of Decentralization with Empirical Evidence from China

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Albert Park ()
Minggao Shen

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Abstract

Decentralization can complement market liberalization by strengthening incentives of agents to exploit local information in response to market signals. In China, however, banks centralized lending authority following financial reforms in the mid-1990s. We offer a new theory of financial decentralization in which centralization provides a credible commitment not to refinance bad projects by reducing available information. Using data from Chinese rural financial institutions, we empirically assess the determinants of decentralization and the likelihood of collateral seizure, strongly confirming the predictions of the refinancing model. We conclude that the inability of financial systems to exploit local information in weak institutional environments may limit the efficiency of financial intermediation despite financial market liberalization.

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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 461.

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Length: 41 pages
Date of creation: 01 Apr 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-461

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Find related papers by JEL classification:
G2 - Financial Economics - - Financial Institutions and Services
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
P3 - Economic Systems - - Socialist Institutions and Their Transitions

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-06-18 (All new papers)
NEP-FIN-2002-06-18 (Finance)

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