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

Jiahua Che ()

No 497, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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.

Keywords: Government Rent Seeking; Ownership of Firms; Township and Village Enterprises; China (search for similar items in EconPapers)
JEL-codes: D23 D72 L33 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2002-01-01
New Economics Papers: this item is included in nep-cfn, nep-com, nep-eec, nep-fin and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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