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

35 Pages Posted: 3 Jan 2003

See all articles by Jiahua Che

Jiahua Che

affiliation not provided to SSRN

Date Written: September 2002

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: Rent Seeking, Ownership of Firms, Township and Village Enterprises, China

JEL Classification: D23, D72, L33

Suggested Citation

Che, Jiahua, Rent Seeking and Government Ownership of Firms: An Application to China's Township-Village Enterprises (September 2002). Available at SSRN: https://ssrn.com/abstract=342940 or http://dx.doi.org/10.2139/ssrn.342940

Jiahua Che (Contact Author)

affiliation not provided to SSRN ( email )

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