Chong-En Bai

Local Protectionism and Regional Specialization: Evidence from China's Industries

This paper uses a dynamic panel estimation method to investigate the determinants of regional specialization in China???s industries, paying particular attention to local protectionism. Less geographic concentration is found in industries where the past tax-plus-profit margins and the shares of state ownership are high, re- flecting stronger local government protection of these industries. The evidence also supports the scale-economies theory of regional specialization. Finally, the overall time trend of regional specialization of China???s industries is found to have reversed an early drop in the mid 1980s, and registered a significant increase in the later years.

The Return to Capital in China

Chinas investment rate is one of the highest in the world, which naturally leads one to suspect that the return to capital in China must be quite low. Using the data from Chinas national accounts, we estimate the rate of return to capital in China. We find that the aggregate rate of return to capital averaged 25% during 1978-1993, fell during 1993-1998, and has become flat at roughly 20% since 1998. This evidence suggests that the aggregate return to capital in China does not appear to be significantly lower than the return to capital in the rest of the world. We also find that the standard deviation of the rate of return to capital across Chinese provinces has fallen since 1978.

The Multitask Theory of State Enterprise Reform: Empirical Evidence from China

The degree of state ownership remains significant in the Chinese economy despite more than two decades of economic reform since 1979. Most of the remaining state- owned enterprises (SOEs) are money losing, and the few exceptional ones tend to be sheltered by government protection in selected industries. Yet China has been enjoying one of the most spectacular growth experiences in world history, and much of the growth is driven by non-state-owned enterprises (non-SOEs). Given the poor financial performance of SOEs, the co-existence of state ownership and non-state ownership in China is a puzzling phenomenon. Does state ownership exist solely for the benefit of politicians, or has state ownership played any role in Chinas spectacular growth? Is there any rationale behind Chinas gradual and selective approach towards privatizing its SOEs? What types of SOEs does the Chinese government choose to privatize? What are the consequences of privatization? In this paper, we offer a multitask theory of SOE reform in the context of China, which has predictions about the types of SOEs to be chosen for privatization and the results of privatization. We then present empirical evidence supporting the basic premise of the theory and its predictions.

Contract Mixing in Franchising as a Mechanism for Public-Good Provision

This paper is concerned with the coexistence of company-owned units and franchised units in business format franchising and their different contractual arrangements. Drawing insights from case studies that indicate both the development and the maintenance of company-wide brand names and unit-specific sales activities are crucial to a franchise company, we construct a multitask model to account for such contract mixing in franchising. Intuitively, low-powered contracts are offered to some managers to induce effort for brand-name development and maintenance, while high-powered contracts are offered to the remaining managers to elicit sales activity and capture the beneficial effect of the company brand name. Franchising can thus be viewed as an organizational agreement for production involving brand-name products and services. Copyright (c) 2000 Massachusetts Institute of Technology.

Revenue Sharing and Control Rights in Team Production: Theories and Evidence from Joint Ventures.*

This paper presents a model of the joint venture that is grounded in the stylized facts we found from a sample of 200 joint venture contracts. The model incorporates the revenue-sharing contract into the incomplete contract frameworks of Grossman-Hart-Moore Property Rights Theory and the Transaction Cost Theory of the firm, and emphasizes the impact of expropriation. Joint control can be optimal as well as unilateral control. Our econometric analysis of the revenue-sharing and control arrangements o?ers strong support to our Property-Rights-Theory motivated model with self investment but rejects that with cooperative investment. The Transaction-Cost-Theory motivated model leaves some important empirical findings unexplained. Our findings also reject some of the existing theories of joint ownership.

A Multi-Task Theory of the State Enterprise Reform

During transition, maintaining employment and providing a social safety net to the unemployed are important to social stability, which in turn is crucial for the productivity of the whole economy. Because independent institutions for social safety are lacking and firms with strong profit incentives have little incentives to promote social stability due to its public good nature, state-owned enterprises (SOEs) are needed to continue their role in providing social welfare. Charged with the multi-tasks of efficient production as well as social welfare provision, SOEs continue to be given low profit incentives and consequently, their financial performance continues to be poor.

Health insurance and consumption: Evidence from China’s New Cooperative Medical Scheme

We exploit a quasi-natural experiment arising from the introduction of a health insurance program in rural China to examine how the insurance coverage affects household consumption. The results show that on average, the health insurance coverage increases non-healthcare related consumption by more than 5 percent. This insurance effect exists even for households with no out-of-pocket medical spending. In addition, the insurance effect is stronger for poorer households and households with worse self-reported health status. These results are consistent with the precautionary saving argument. Moreover, the insurance effect varies by household experience with the program. Particularly, the effect is significant only in villages where at least some households have actually obtained reimbursement from the insurance program. Within these villages, the program stimulates less consumption among the new participants than among households that have participated in the program for more than one year.

Efficiency Losses from Tax Distortions vs. Government Control

Why has the rapid privatization of firms in Eastern Europe and the former Soviet Union not brought dramatically higher performance as expected? If private ownership were so clearly dominant, why has state control of enterprises been such a common phenomenon historically, even in many Western countries? In this paper, we argue that with private ownership, any price distortions (whether from high tax rates or explicit price controls) generate efficiency losses roughly proportional to the square of the implicit tax rate. In contrast, the efficiency loss under state ownership should be largely independent of these implicit tax rates. Therefore, the efficiency loss from state ownership can be less than that from private ownership when price distortions become large enough. Historically, there does seem to have been a close association between state ownership and high tax rates. For good reasons, privatization is normally associated with sharp drops in tax and nontax distortions. When privatization occurs without a substantial reduction in tax rates, as in Russia, efficiency costs from the high tax rates have been obvious, raising questions about the internal consistency of this set of policies.

Do College Entrance Examination Scores Predict Undergraduate GPAs? A Tale of Two Universities

Each year, millions of Chinese high school students sit the National College Entrance Examination (CEE). For the majority of students, the CEE score is the single determinant in whether they gain admission into a college and to what college they enter. The purpose of this paper is to determine whether and how well the CEE score predicts college academic success. We also consider high school achievement and admission route in predicting college grades. We obtain administrative data on CEE and undergraduate GPAs from two Chinese universities with very different rankings. We find that, for both universities the CEE total score predicts undergraduate GPAs for all four years in college. Even the size of the estimates for CEE is similar for the two universities. High school achievement and admission routes are also significant predictors of college grades. However, we do not find consistent results as to which CEE subject test scores predict students’ academic performance in college.

FINANCIAL REPRESSION AND OPTIMAL TAXATION

Financial repression entails an implicit taxation on savings. When effective income-tax rates are very uneven, as common in developing countries, raising some government revenue through mild financial repression can be more efficient than collecting income tax only.