In 1980, China's government owned and controlled its state enterprises, which were managed (inefficiently) by bureaucrats. During the 1980s, the government experimented with decentralizing state enterprises to boost productivity. By decade's end, China's state enterprises had become more market-oriented, and the structure of enterprise property rights had changed dramatically. The author examines how China's government and state enterprises partitioned property rights -how the government and enterprises decided about incentives, financial arrangements, and control rights. The author assumes that the government is risk-neutral and the enterprise manager is risk-averse; that the government's goal is to increase revenue (or profitability), to retain control of the firms (by bailing out firms in financial trouble and collective heavier taxes on high-performing firms). The enterprise manager and employees, on the other hand, have an informational advantage over the government that allows them to earn a rent; that advantage leads to suboptimal efforts. Among the author's findings: (1) The ways the government and enterprises partitioned property rights were consistent with the prediction of the principal-agent model based on the above assumption. (2) Many of the changes in property rights reflected the government's attempt to cope with managerial informational advantage. (3) The government, in striving for equality, rewards inefficient firms while penalizing efficient ones (the so-called ratchet effect). Efficient firms are unwilling to reveal their true efficiency. They pretend to be inefficient by slacking, so they can get more transfers. So, there are inherent conflicts between two of the government's goals: profitability and equality. And the government's desire to control state enterprises prevents many of them from becoming decentralized and improving their productivity.
Details
-
Author
-
Document Date
1997/03/31
-
Document Type
Policy Research Working Paper
-
Report Number
WPS1743
-
Volume No
1
-
Total Volume(s)
1
-
Country
-
Region
-
Disclosure Date
2010/07/01
-
Doc Name
How China's government and state enterprises partitioned property and control rights
-
Keywords
Public enterprises; Property rights; Incentives; Centrally planned economies; Profitability; Income redistribution; Access to information; Efficiency; Management attitudes; Financial management; Employee attitudes; Enterprise control; Transitional economies
- See More
Downloads
COMPLETE REPORT
Official version of document (may contain signatures, etc)
- Official PDF
- TXT*
- Total Downloads** :
- Download Stats
-
*The text version is uncorrected OCR text and is included solely to benefit users with slow connectivity.
Citation
Xu,L. Colin
How China's government and state enterprises partitioned property and control rights (English). Policy, Research working paper ; no. WPS 1743 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/156031468770462408/How-Chinas-government-and-state-enterprises-partitioned-property-and-control-rights