No abstract

We study China's township-village enterprises (TVEs) from an organizational perspective with a focus on governance. Unlike most previous studies, we interpret the firm boundaries of TVEs at the community level rather than the enterprise level. From this perspective, we analyze the central role that community governments play in TVE governance as an organizational response to the imperfect institutional environment of both state and market Specifically we show that the community government's involvement in TVEs helps overcome the problems of state predation and underfinancing of private enterprises. We also explain why TVE governance leads to harder budget constraints than state-owned enterprises.

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.

No 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 holdup 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.