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Insecure Property rights and Government Ownership of Firms

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  • Jiahua Che
  • Yingyi Qian

Abstract

China's remarkable economic growth occurred despite (1) the lack of rule of law to secure property rights against state encroachment; and (2) government ownership of most new and successful non-state firms. We develop a theory of ownership under state predation that incorporates these two considerations. In our theory, "private ownership" leads to excessive revenue hiding and "state ownership" fails to provide incentives for managers and local governments in a credible way. In contrast, "local government ownership" integrates local government activities and business activities together, which may not only provide incentives for local governments, but also involves less revenue hiding from the local government and less predation from the state. Furthermore, ownership diversity across localities and within a locality is possible. Our theory is consistent with empirical evidence from China. We thus interpret local government ownership as an organizational response to imperfect state institutions.

Suggested Citation

  • Jiahua Che & Yingyi Qian, 1997. "Insecure Property rights and Government Ownership of Firms," William Davidson Institute Working Papers Series 51, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1997-52
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    References listed on IDEAS

    as
    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
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    4. Che, Jiahua & Qian, Yingyi, 1998. "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises," Journal of Law, Economics, and Organization, Oxford University Press, pages 1-23.
    5. Chang Chun & Wang Yijiang, 1994. "The Nature of the Township-Village Enterprise," Journal of Comparative Economics, Elsevier, vol. 19(3), pages 434-452, December.
    6. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-991, September.
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    8. Andrei Shleifer & Robert W. Vishny, 1994. "Politicians and Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 995-1025.
    9. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
    10. Yingyi Qian, 1996. "Enterprise reform in China: agency problems and political control," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(2), pages 427-447, October.
    11. Hehui Jin & Yingyi Qian, 1998. "Public Versus Private Ownership of Firms: Evidence from Rural China," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 773-808.
    12. repec:hrv:faseco:30727607 is not listed on IDEAS
    13. Greif, Avner & Milgrom, Paul & Weingast, Barry R, 1994. "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 745-776, August.
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