Property Rights and Investment Among Chinese Firms: The Importance of Sunk Costs

Paul Minard

Chinese Economy, 2015, vol. 48, issue 6, 413-429

Abstract: Although numerous studies have demonstrated an association between property rights and economic performance, we lack a good understanding of the channels mediating this association. This article examines data from a World Bank survey of 12,400 Chinese industrial firms and presents evidence consistent with a “sunk cost mechanism” by which property rights affect firm investment levels, new fixed asset investment being more responsive to property rights security among firms with high sunk costs. This finding is robust to two proxies for sunk costs, and is as predicted by an options model of optimal investment.

Date: 2015
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DOI: 10.1080/10971475.2015.1081806

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