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A Principal-agent Theory of the Public Economy and Its Applications to China

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  • Weiying Zhang

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Abstract

This paper is intended to model the principal-agent relationship and its associated monitoring-incentive problems of the public economy. The basic findings are: (1) the degree of publicness and the size of the public economy matter: the monitoring effort of the original principals and the work effort of the ultimate agents decrease with the degree of publicness and the size of the public economy; (2) a corrupt public economy can be a Pareto-improvement over the non-corrupt public economy. The first finding sheds some light upon performance comparison between different public economies (such as between Singapore and China). The second finding explains why all socialist economies are corrupt ones. The paper applies the above results particularly to the Chinese economy. Copyright Kluwer Academic Publishers 1998

Suggested Citation

  • Weiying Zhang, 1998. "A Principal-agent Theory of the Public Economy and Its Applications to China," Economic Change and Restructuring, Springer, vol. 31(2), pages 231-251, May.
  • Handle: RePEc:kap:ecopln:v:31:y:1998:i:2:p:231-251 DOI: 10.1023/A:1003564611629
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    References listed on IDEAS

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    1. Yingyi Qian, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 527-544.
    2. Michael Keren & David Levhari, 1979. "The Optimum Span of Control in a Pure Hierarchy," Management Science, INFORMS, pages 1162-1172.
    3. Zhang, Weiying, 1997. "Decision rights, residual claim and performance: A theory of how the Chinese state enterprise reform works," China Economic Review, Elsevier, vol. 8(1), pages 67-82.
    4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    5. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
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    Cited by:

    1. Liu, Xiaojie & Shen, Jim Huangnan & Deng, Kent, 2016. "A rational path towards a Pareto optimum for reforms of large state-owned enterprise in China, past, present and future," Economic History Working Papers 67019, London School of Economics and Political Science, Department of Economic History.
    2. Shen, Huangnan & Fang, Lei & Deng, Kent, 2017. "Rise of ‘Red Zaibatsu’ in China: entrenchment and expansion of large state-owned enterprises, 1990-2016," Economic History Working Papers 75214, London School of Economics and Political Science, Department of Economic History.

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