Tian Zhu

Ownership restructuring in Chinese state industry: An analysis of evidence on initial organizational changes

China has now entered the third decade of its economic reform. While the sweeping decollectivization in the rural sector during the early 1980s is widely regarded as successful, reform in the urban sector has proceeded at a much slower pace and with mixed results. For overviews, see Barry Naughton, Growing Out of the Plan: Chinese Economic Reform, 1978–1993 (New York: Cambridge University Press, 1995); Dwight H. Perkins, “Reforming Chinas economic system,” Journal of Economic Literature , Vol. 26 (1988), pp. 601–645, and “Completing Chinas move to the market,” Journal of Economic Perspectives , Vol. 8 (1994), pp. 23–46. The main carriers of economic activities in the urban sector are state-owned enterprises (SOEs). Since 1993, the Chinese government has embarked on a major effort to shift the focus of SOE reform from delegation of decision-making authority to enterprises, which was the predominant strategy in the preceding decade, to ownership restructuring.

Foreign Direct Investment Under Weak Rule of Law: Theory and Evidence from China

This paper develops a self-enforcing contract model to show that better economic fundamentals can help when there is weak rule of law -- but with order -- to attract foreign direct investment, whereas lowering taxes does not necessarily help. Using a cross-region Chinese dataset, the analysis finds evidence consistent with the theoretical analysis. Regional variations in tax rates and the perceived quality of formal contracting institutions are not correlated with regional inflows of foreign direct investment, but leadership characteristics are. Most conventional economic factors have the predicted effects on foreign direct investment. The finding that foreign direct investment is lower in locations where domestic private firms have better access to finance and where the air quality is poor is new to the literature.

Holdups, simple contracts and information acquisition

Abstract In a typical procurement setup, several recent papers have shown that when complete contracting is not possible, simple, noncontingent contracts may suffice to solve the under-investment problem. This paper points out that a noncontingent contract offer such as a fixed-price contract may induce the seller to acquire information on the future course of costs and only to accept the offer if the cost is low. It is shown that sometimes the buyer prefers to wait and buy on the spot market than to offer a long-term contract. When the seller rejects a contract offer or the buyer chooses not to make one, the seller will not make efficient investments because he expects to be held up on the spot market.

Foreign Direct Investment Under a Weak Rule of Law

We have developed a self‐enforcing contract model to show that better economic fundamentals can help an area or a region under a weak rule of law – but with order – to attract foreign direct investments (FDIs), whereas lowering taxes does not necessarily help. Using a cross‐region Chinese dataset, we find evidence consistent with our theoretical analysis. Regional variations in tax rates and the perceived quality of formal contracting institutions are not correlated with regional FDI inflows, but leadership characteristics are. Most conventional economic factors have the predicted effects on FDIs. The finding that FDI is lower in locations where domestic private firms have better access to finance and where the air quality is poor is also new to the literature.

An agency theory of transactions without contract enforcement: The case of China

Abstract This paper offers a theory to explain in the Chinese context how interfirm transactions can be effectively carried out in the absence of a sound contract enforcement system. Noting that the development of Chinas nonstate sector, the primary contributor to its rapid economic growth, has relied heavily on its transactional relationships with the state sector, we develop an agency theory of interfirm transactions based on the following idea: a state enterprise manager, being an agent, may acquire private benefits in exchange for not holding up a nonstate trading partner; and this, in turn, improves the latters incentive for transaction-specific investments.

How much can we trust China’s investment statistics?

Abstract Building upon recent research into the underestimation of China’s official final consumption expenditure, this paper investigates the quality of China’s investment data. We strictly follow the official method to estimate the annual gross fixed capital formation (GFCF) expenditure from 2004 to 2012, and the resulting figures are significantly different from the official statistics. This implies that the ‘total investment in fixed assets’ data, which are the primary source for the estimation of GFCF, grossly exaggerate actual investments, and that the official GFCF figures are not, strictly speaking, independently estimated, as they are purported to be. We deduce that the official gross capital formation figure is more or less a residual item obtained by subtracting final consumption and net exports from the official GDP figure that is calculated based on the production-cum-income approach. As a result, the underestimation of China’s consumption expenditure automatically translates into overestimation of investment expenditure. We conclude that China’s official consumption and investment statistics cannot be trusted as the basis for policy discussions and academic research.

Contract Law and the Boundary of the Firm

This paper develops a simple structural model of the boundaries of the firm to formalize some of the aspects of the Williamsonian transaction cost economics that are distinct from Grossman, Hart and Moores formal property rights theory. We build on two ideas. First, we employ Williamsons idea that alternative modes of governance of transactions work out of different contract law regimes; i.e., whereas interfirm transactions may be governed by court-enforced contracts, intrafirm transactions are governed by the implicit law of forbearance. The application of the forbearance doctrine to internal organization limits the use of incentive contracts within the firm and gives rise to the cost of integration. Second, we incorporate from the property rights theory the idea that it is easier to replace an employee-manager than to replace an independent subcontractor. As a result, some observable but unverifiable information can be effectively used in the internal governance of the firm but not in the governance of contractual interfirm relations. This difference is identified as the source of the benefits of integration. Moreover, while we treat contract law differences as an institutional constraint, we argue in the context of the model that such differences entail no efficiency losses.