How does government intervention affect the formation of zombie firms?

Qingqing Chang, Yisihong Zhou, Guangqiang Liu, Di Wang and Xiaojie Zhang

Economic Modelling, 2021, vol. 94, issue C, 768-779

Abstract: Zombie firms cause serious, widespread harm to the economy. It is thus important to clarify the reasons for their formation. This paper empirically investigates the effects of government intervention on the formation of zombie firms. It suggests that a greater degree of government intervention can increase the risk that a firm will become a zombie firm. Robustness tests and endogeneity tests confirm this finding. Further, we undertake a preliminary exploration of the mechanism of government intervention on the formation of zombie firms, and study how government behaviors affect the formation of such firms from various perspectives. Analysis reveals that government induces the formation of zombie firms by means of subsidies, resource support, financial support, and tax. To a certain extent, the conclusions of this paper could guide the formulation and revision of government policies, which would be conducive to adjusting the direction and intensity of government intervention and providing new ideas for supply-side structural reforms in China. The Chinese government should further increase the role of market force in its reforms.

Keywords: Zombie firms; Government intervention; Supporting hand; Grabbing hand; China (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:94:y:2021:i:c:p:768-779

DOI: 10.1016/j.econmod.2020.02.017

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