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Rent Seeking and Government Ownership of Firms: An Application to China's Township-Village Enterprises

  • Che, Jiahua

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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Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 30 (2002)
Issue (Month): 4 (December)
Pages: 787-811

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Handle: RePEc:eee:jcecon:v:30:y:2002:i:4:p:787-811
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622864

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