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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.

Suggested Citation

  • Loren Brandt & Hongbin Li & Joanne Roberts, 2001. "Why do Governments Privatize," William Davidson Institute Working Papers Series 429, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2001-429

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    References listed on IDEAS

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    Cited by:

    1. Peter Li, 2009. "The Duality of Crony Corruption in Economic Transition: Toward an Integrated Framework," Journal of Business Ethics, Springer, vol. 85(1), pages 41-55, March.
    2. Minggao Shen & Jikun Huang & Linxiu Zhang & Scott Rozelle, 2010. "Financial reform and transition in China: a study of the evolution of banks in rural China," Agricultural Finance Review, Emerald Group Publishing, vol. 70(3), pages 305-332, November.
    3. Park, Albert & Shen, Minggao, 2003. "Joint liability lending and the rise and fall of China's township and village enterprises," Journal of Development Economics, Elsevier, vol. 71(2), pages 497-531, August.
    4. Li, Hongbin & Rozelle, Scott, 2003. "Privatizing Rural China: The Role of Screening, Learning, and Contractual Innovation on the Evolution of Township Enterprises," Working Papers 225889, University of California, Davis, Department of Agricultural and Resource Economics.
    5. Diana Stirbu, 2015. "New Spaces for Change Policy Challenges and Opportunities Offered by Devolution in the UK," Public administration issues, Higher School of Economics, issue 5, pages 66-81.
    6. Jiahua Che, 2003. "The Life Cycle of Government Ownership," William Davidson Institute Working Papers Series 2003-627, William Davidson Institute at the University of Michigan.
    7. David Li & Francis Lui, 2004. "Why Do Governments Dump State Enterprises?Evidence from China," NBER Chapters,in: Governance, Regulation, and Privatization in the Asia-Pacific Region, NBER East Asia Seminar on Economics, Volume 12, pages 211-230 National Bureau of Economic Research, Inc.
    8. Li, Hongbin & Rozelle, Scott, 2001. "Insider Privatization With A Tail: The Buyout Price And Performance Of Privatized Firms In Rural China," Working Papers 11968, University of California, Davis, Department of Agricultural and Resource Economics.
    9. Fang, Xiangming & Smith, Rodney B.W., 2002. "Barriers To Efficiency And The Privatization Of Township-Village Enterprises," 2002 Annual meeting, July 28-31, Long Beach, CA 19744, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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    privatization; township and village enterprises; financial institutions;

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