Contingent and ambiguous property rights: The Case of China's Reform

We reconsider the theory of ambiguous property rights in China. In a static game context, this ownership allocation is good because a local entrepreneur can probably get services provided by local bureaucrats at lower costs than a private owner; but bad because once knowing the firm’s unobservable income, local bureaucrats are likely to encroach the firm. In an ongoing relationship, such a predatory behaviour may be limited if local bureaucrats care enough about future returns. Ironically, they often discount future too much. An additional device to supplement the shadow of future is needed. In China, this is the contingent delegation from the central. Under this policy, local bureaucrats must compete to gain more autonomy on the basis of local economy’s performance. If the expected gain from the competition is sufficiently large, it may become incentive compatible for capable local bureaucrats to enhance local firms, despite incapable ones shirks. For those shirkers, the central still keeps regulating their activities as if they were under the central planing regime. One then sees that the pace of reform is slow and uneven across regions or sectors. It may be seen as a step back compared with a rapid and large-scale reform such as the one in the Former Soviet Union. However, this policy has served reasonably well to solve some incentive problems in reform, including the central contradiction: the local agencies blame the central for lack of autonomy; and the central blames them for lack of accountability.