A Refinancing Model of Decentralization with Empirical Evidence from China

Albert Park and Minggao Shen ()

No 461, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: Decentralization can complement market liberalization by strengthening incentives of agents to exploit local information in response to market signals. In China, however, banks centralized lending authority following financial reforms in the mid-1990s. We offer a new theory of financial decentralization in which centralization provides a credible commitment not to refinance bad projects by reducing available information. Using data from Chinese rural financial institutions, we empirically assess the determinants of decentralization and the likelihood of collateral seizure, strongly confirming the predictions of the refinancing model. We conclude that the inability of financial systems to exploit local information in weak institutional environments may limit the efficiency of financial intermediation despite financial market liberalization.

Keywords: banking; decentralization; refinancing; transition; China (search for similar items in EconPapers)
JEL-codes: D8 G2 P3 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2002-04-01
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (2)

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