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Rent Seeking and Government Ownership of Firms: An Application to China???s Township-Village Enterprises

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  • Jihua Che

Abstract

Using its control of regulated inputs, a government agency extracts rents from a manager who undertakes an investment. Such government rent-seeking activity leads to a typical hold-up problem. Government ownership serves as a second-best commitment mechanism, through which the government agency will restrain itself from the rent-seeking activity and may even offer the manager assistance in the form of tax breaks and subsidies. This mechanism works at a cost, however, as government ownership also compromises ex post managerial incentives and creates distortion in resource allocation. Nevertheless, government ownership Pareto dominates private ownership under certain conditions. These conditions correspond to a host of stylized empirical observations concerning local government-owned firms, i.e., township-village enterprises, during China???s transition to a market economy.

Suggested Citation

  • Jihua Che, 2002. "Rent Seeking and Government Ownership of Firms: An Application to China???s Township-Village Enterprises," William Davidson Institute Working Papers Series 497, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2002-497
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    References listed on IDEAS

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    More about this item

    Keywords

    Government Rent Seeking; Ownership of Firms; Township and Village Enterprises; China;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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