Insecure Property Rights and Government Ownership of Firms

Abstract:     
China's remarkable economic growth occurred despite (1) the lack of secure property rights; and (2) government ownership of most non-state firms such as township-village enterprises. We unravel these two puzzles with a theory of ownership of firms facing state predation. We distinguish and compare three types of ownerships: state ownership, government ownership, and private ownership. We argue that it may become more credible for the state to prey on government owned enterprises less than private enterprises, as government agencies carry out certain government activities financed by tax revenue for the state. Our theory has several implications: government ownership is an organizational response to imperfect state institutions; balancing power of governments at different levels can be efficiency enhancing; and the efficiency loss from insecure property rights could be smaller than conventional theory would predict.

JEL Classification: G3

working papers series