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

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.

Foreign competition, domestic competition and innovation in Chinese private high-tech new ventures

“…The governments in transitional economies such as China often possess significant strategic resources and usually serve as an important source of resources for SOEs (Hoskisson et al, 2000;Ma & Delios, 2010). Private new ventures in China are typically resource constrained, and funding for innovation is rather limited as they are discriminated against in China's credit market, which is based on connections and government intervention rather than commercial considerations (Che, 2002;McMillan & Woodruff, 2002).…”

Economic and institutional reform packages and their impact on productivity: A case study of Chinese township and village enterprises

“…As bureaucratic controls were mitigated by economic development, the involvement of local cadres inhibited enterprise performance. Instead, market competition played a significant role in disciplining performance and inducing the exit of loss-making enterprises by driving down profit margins, as Jin and Qian (1998), Che (2002), and Li (2003) discuss. Peng (2001) argues that this mechanism works better for PCOEs than for SOEs because profits and losses of the latter 15 Although Murakami et al (1996) verify that labor decisions were made according to profit-maximizing principles, Weitzman and Xu (1994) and Gregory and Meng (1995) disagree.…”

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“…Due to the great number of nominal owners, there is little incentive for managers to protect owners' interests. Monitoring by government officials has little effect when personal gains from rent seeking are not caught and punished, and the negative phenomena are reinforced when banks are also state-owned and directed by rent-seeking managers and government officials (Che 2002;Lin 2005;Zhu 1998)-ownership transformation becomes essential to improve the performance of SOEs.…”