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Sources of investment inefficiency: The case of fixed-asset investment in China

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  • Qin, Duo
  • Song, Haiyan

Abstract

This study attempts to measure the inefficiency associated with aggregate investment in a transitional economy. The inefficiency is decomposed into allocative and technical inefficiency based on standard production theory. Allocative inefficiency is measured by the deviation of actual investment from the theoretically desired investment demand. Institutional factors are then identified as part of the driving force of the deviation. The resulting model is applied to Chinese provincial panel data. The main findings are: Chinese investment demand is strongly receptive to expansionary fiscal policies and inter-provincial network effects; the tendency of over-investment remains, even with signs of increasing allocative efficiency and improving technical efficiency.

Suggested Citation

  • Qin, Duo & Song, Haiyan, 2009. "Sources of investment inefficiency: The case of fixed-asset investment in China," Journal of Development Economics, Elsevier, vol. 90(1), pages 94-105, September.
    • Handle: RePEc:eee:deveco:v:90:y:2009:i:1:p:94-105
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    More about this item

    Keywords

    Over-investment Efficiency Soft-budget constraint;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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