Regulation of local governments and enterprise formation in rural China

With the rise of the private sector in rural China, power has been shifting from the hands of local government officials to the hands of entrepreneurs. In this situation, economic theory offers two opposing predictions regarding how local governments will react to the attrition of power: the economic losers hypothesis (local governments will resist change because it threatens their economic rents) and the helping hand hypothesis (incentives of local government are aligned with the change, limiting resistance). We econometrically test the two hypotheses using a nationally representative sample of data on almost 2500 villages in rural China. Our findings provide strong support for the economic losers hypothesis - local governments resist competition that emerges with the rise of private firms using discriminatory regulation. Our findings suggest that entrepreneurial policies that encourage an impartial regulatory environment for different types of enterprises in rural China may have long run efficiency implication for China's economy. However, left on their own, local governments may not have an incentive to promote such reforms.