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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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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp429.pdf
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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. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
  2. Jiahua Che & Yingyi Qian, 1998. "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises," William Davidson Institute Working Papers Series 59, William Davidson Institute at the University of Michigan.
  3. Nandini Gupta & John Ham & Jan Svejnar, 2000. "Priorities and Sequencing in Privatization: Theory and Evidence from the Czech Republic," Econometric Society World Congress 2000 Contributed Papers 1580, Econometric Society.
  4. Loren Brandt & Hongbin Li, 2002. "Bank Discrimination in Transition Economies: Ideology, Information or Incentives?," William Davidson Institute Working Papers Series 517, William Davidson Institute at the University of Michigan.
  5. Diamond, Douglas W, 1997. "Liquidity, Banks, and Markets," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 928-56, October.
  6. 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.
  7. 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.
  8. Chang Chun & Wang Yijiang, 1994. "The Nature of the Township-Village Enterprise," Journal of Comparative Economics, Elsevier, vol. 19(3), pages 434-452, December.
  9. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W., 1997. "Privatizing Russia," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522284, June.
  10. 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.
  11. 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.
  12. Yuanzheng Cao & Yingyi Qian & Barry R. Weingast, 1999. "From federalism, Chinese style to privatization, Chinese style," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 103-131, March.
  13. 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.
  14. Clarke, George R. G. & Cull, Robert, 2001. "Bank privatization in Argentina : a model of political constraints and differential outcomes," Policy Research Working Paper Series 2633, The World Bank.
  15. Hongbin Li & Li-An Zhou, 2003. "Political Turnover and Economic Performance: The Disciplinary Role of Personnel Control in China," Discussion Papers 00002, Chinese University of Hong Kong, Department of Economics.
  16. Albert Park & Loren Brandt & John Giles, 1997. "Giving Credit Where Credit is Due: The Changing Role of Rural Financial Institutions in China," William Davidson Institute Working Papers Series 71, William Davidson Institute at the University of Michigan.
  17. Repullo,R. & Suarez,J., 1995. "Monitoring,Liquidation,and Security Design," Papers 9520, Centro de Estudios Monetarios Y Financieros-.
  18. Hongbin Li & Scott Rozelle, 2003. "Privatizing Rural China: Insider Privatization, Innovative Contracts, and the Performance of Township Enterprises1," Discussion Papers 00001, Chinese University of Hong Kong, Department of Economics.
  19. Li, Shaomin & Li, Shuhe & Zhang, Weiying, 2000. "The Road to Capitalism: Competition and Institutional Change in China," Journal of Comparative Economics, Elsevier, vol. 28(2), pages 269-292, June.
  20. Li, Hongbin, 2003. "Government's budget constraint, competition, and privatization: evidence from China's rural industry," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 486-502, September.
  21. 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.
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