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From the Grabbing Hand to the Helping Hand

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  • Jiahua Che

Abstract

I present a study of ownership of firms under government rent seeking. Using its control of regulated inputs, a government agency extracts rents from a manager who undertakes an investment. Such a government rent seeking activity leads to a typical hold-up problem. Government ownership is shown to serve as a second best commitment mechanism through which the government agency will restrain itself from the rent seeking activity and even offer the manager support and favor such as tax breaks and subsidies. This mechanism works at a cost as government ownership compromises ex post managerial incentives and creates distortion in resource allocation. Nevertheless, under some fairly general conditions, government ownership Pareto dominates private ownership. The analysis corresponds to a host of stylized empirical observations concerning local government-owned firms during China's transition to a market economy. Based on this analysis, I suggest that local government owned firms will be transformed to private ownership as China's input markets become more liberalized.

Suggested Citation

  • Jiahua Che, 2000. "From the Grabbing Hand to the Helping Hand," William Davidson Institute Working Papers Series 58, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2000-58
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/39448/3/wp58.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jeffrey Sachs & Wing Thye Woo & Xiaokai Yang, 2000. "Economic Reforms and Constitutional Transition," Annals of Economics and Finance, Society for AEF, vol. 1(2), pages 423-479, November.
    2. Che, Jiahua, 2002. "Rent Seeking and Government Ownership of Firms: An Application to China's Township-Village Enterprises," Journal of Comparative Economics, Elsevier, vol. 30(4), pages 787-811, December.
    3. Boudewijn Bouckaert, 2007. "Bureaupreneurs in China: we did it our way," European Journal of Law and Economics, Springer, vol. 23(2), pages 169-195, April.

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    Keywords

    corruption; bribery; government ownership; China's non-state sector;

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