From Grabbing Hands to Helping Hands

Conference Paper No. F04, The 4th Annual International Conference on Transition Economics

34 Pages Posted: 15 Sep 1999

See all articles by Jiahua Che

Jiahua Che

affiliation not provided to SSRN

Abstract

I present a study of ownership of firms under government rent seeking. Using its control of regulated inputs, a government agency extracts rents from a manager who undertakes an investment. Such a government rent seeking activity leads to a typical hold-up problem. Government ownership is shown to serve as a second best commitment mechanism through which the government agency will restrain itself from the rent seeking activity and even offer the manager support and favor such as tax breaks and subsidies. This mechanism works at a cost as government ownership compromises ex post managerial incentives and creates distortion in resource allocation. Nevertheless, under some fairly general conditions, government ownership Pareto dominates private ownership. The analysis corresponds to a host of stylized empirical observations concerning local government owned firms during China's transition to a market economy. Based on this analysis, I suggest that local government owned firms will be transformed to private ownership as China's input markets become more liberalized.

JEL Classification: G32, G34

Suggested Citation

Che, Jiahua, From Grabbing Hands to Helping Hands. Conference Paper No. F04, The 4th Annual International Conference on Transition Economics, Available at SSRN: https://ssrn.com/abstract=180715 or http://dx.doi.org/10.2139/ssrn.180715

Jiahua Che (Contact Author)

affiliation not provided to SSRN ( email )

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