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Employment burden, government ownership and soft budget constraints: Evidence from a Chinese enterprise survey

  • Li, Lixing

This paper investigates two competing theories of soft budget constraint (SBC), namely the ownership hypothesis and the policy burden hypothesis. While the ownership hypothesis attributes the SBC problem to government ownership, the policy burden hypothesis predicts that privatization would not eliminate the SBC problem, as long as the major policy burden - maintaining employment - is not removed from enterprises. Using a panel dataset from a survey of Chinese enterprises, I conduct empirical tests on these two competing hypotheses. I explicitly address endogeneity and data-censoring problems by using instruments and estimating a two-step tobit model. The test results support the policy burden hypothesis but not the ownership hypothesis. My finding emphasizes the importance of creating a sound social security system in the process of China's enterprise reform.

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Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 19 (2008)
Issue (Month): 2 (June)
Pages: 215-229

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Handle: RePEc:eee:chieco:v:19:y:2008:i:2:p:215-229
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  1. Li, D.D., 1992. "Public Ownership as a Sufficient Condition for the Soft Budget Constraint," Papers 93-07, Michigan - Center for Research on Economic & Social Theory.
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  3. Hehui Jin & Yingyi Qian & Barry Weingast, 1999. "Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style," Working Papers 99013, Stanford University, Department of Economics.
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  20. Loren Brandt & Hongbin Li & Joanne Roberts, 2005. "Banks and Enterprise Privatization in China," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 524-546, October.
  21. Li, David D. & Liang, Minsong, 1998. "Causes of the Soft Budget Constraint: Evidence on Three Explanations," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 104-116, March.
  22. Cull, Robert & Xu, Lixin Colin, 2003. "Who gets credit? The behavior of bureaucrats and state banks in allocating credit to Chinese state-owned enterprises," Journal of Development Economics, Elsevier, vol. 71(2), pages 533-559, August.
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  26. Bai, Chong-En & Li, David D. & Tao, Zhigang & Wang, Yijiang, 2000. "A Multitask Theory of State Enterprise Reform," Journal of Comparative Economics, Elsevier, vol. 28(4), pages 716-738, December.
  27. Bai, Chong-en & Wang, Yijiang, 1998. "Bureaucratic Control and the Soft Budget Constraint," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 41-61, March.
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