Collusion and Economic Growth: A New Perspective on the China Model

Huihua Nie and Jinbo Li

Economic and Political Studies, 2013, vol. 1, issue 2, 18-39

Abstract: In this paper we propose a political-economy model of China that explains both the rapid economic growth frequent rate of accidents that have occurred in China. The central government delegates authority to the local government to regulate the production activities of the firm. Under information asymmetry the local government can collude with the firm choose “bad” technology the use of which will lead to faster economic growth more accidents than the use of “good” technology. We characterize optimal equilibrium within collusion contracts under which the central government will allow collusion when the cost to eliminate collusion is high. We also characterize the optimal collusion-proof contract under which the payments reprimands taxes that take place between the local government the firm are endogenously determined. Our predictions on collusion growth are supported by an empirical study on the coal industry.

Date: 2013
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DOI: 10.1080/20954816.2013.11673858

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