Using its control of regulated inputs, a government agency extracts rents from a manager who undertakes an investment. Such government rent-seeking activity leads to a typical hold-up problem. Government ownership serves as a second-best commitment mechanism, through which the government agency will restrain itself from the rent-seeking activity and may even offer the manager assistance in the form of tax breaks and subsidies. This mechanism works at a cost, however, as government ownership also compromises ex post managerial incentives and creates distortion in resource allocation. Nevertheless, government ownership Pareto dominates private ownership under certain conditions. These conditions correspond to a host of stylized empirical observations concerning local government-owned firms, i.e., township-village enterprises, during China’s transition to a market economy.
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Length: 59 pages Date of creation: 01 Jan 2002 Date of revision: Handle: RePEc:wdi:papers:2002-497
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Find related papers by JEL classification: D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out
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Shleifer, Andrei & Vishny, Robert W, 1993.
"Corruption,"
The Quarterly Journal of Economics,
MIT Press, vol. 108(3), pages 599-617, August.
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Andrei Shleifer & Robert W. Vishny, 1993.
"Corruption,"
NBER Working Papers
4372, National Bureau of Economic Research, Inc.
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