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Why do Governments Privatize

  • Loren Brandt
  • Hongbin Li
  • Joanne Roberts

The role of township-owned enterprises in the rapid growth of the Chinese economy during reform is widely acknowledged. Beginning in the mid-1990s, however, these firms began to be privatized. Perhaps the most striking feature of this process is that it has not occurred uniformly across townships. This raises the simple question: When and why do government leaders privatize? Drawing on a unique data set we collected in the summers of 1998 and 2000, this paper provides a simple theoretical and empirical investigation into this question. We focus on the effect of bank liquidity and bank objectives in determining the value of the firm in the event of privatization. We consider how bank decisions interact with those of governmental leaders and firm managers and ultimately determine the attractiveness of privatization. We also analyze the conditions under which shutdown might be preferred to privatization as a method to divest of government-owned firms. We find that this simple model of the privatization decision yields insights which can be tested with this unique data set.

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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 429.

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Length: pages
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:wdi:papers:2001-429
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  1. Repullo,R. & Suarez,J., 1995. "Monitoring,Liquidation,and Security Design," Papers 9520, Centro de Estudios Monetarios Y Financieros-.
  2. Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-46, September.
  3. Weitzman Martin L. & Xu Chenggang, 1994. "Chinese Township-Village Enterprises as Vaguely Defined Cooperatives," Journal of Comparative Economics, Elsevier, vol. 18(2), pages 121-145, April.
  4. 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.
  5. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
  6. Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993. "Privatizing Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 139-192.
  7. Yuanzheng Cao & Yingyi Qian & Barry R. Weingast, 1997. "From Federalism, Chinese Style, to Privatization, Chinese Style," Working Papers 97049, Stanford University, Department of Economics.
  8. Chen, Hongyi & Rozelle, Scott, 1999. "Leaders, managers, and the organization of township and village enterprises in China," Journal of Development Economics, Elsevier, vol. 60(2), pages 529-557, December.
  9. Douglas W. Diamond, . "Liquidity, Banks and Markets," CRSP working papers 326, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  10. Gary H. Jefferson & Thomas G. Rawski, 1994. "Enterprise Reform in Chinese Industry," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 47-70, Spring.
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