Political and Economic Incentives of Government in Partial Privatization
57 Pages Posted: 5 Mar 2012 Last revised: 27 Nov 2016
Date Written: March 27, 2014
This study examines the government’s incentives to control partially privatized SOEs in share issue privatization in China. In addition to controlling firms in strategic industries, in certain geographical areas, and that have related party transactions, our result shows that government selects and controls firms that have better valuations and employ more workers vis-à-vis comparable private firms. Particularly, local governments, which are more likely to face hard budget constraints, might spend the profits of government controlled firms to hire more workers (Boycko et al, 1996), suggesting that government pursues efficiency and political objectives simultaneously. Our study finds that local governments prefer to control relatively more efficient firms that hire more workers, while central government prefer to controls firms that hire more workers regardless of efficiency. We estimate the impact of government’s decision on firm valuations and employment and find a pronounced economic impact to preserve employment and a limited impact to improve efficiency.
Keywords: Partial privatization; Political objectives; State ownership; Employment; Chinese economy
JEL Classification: G32, G38, P34
Suggested Citation: Suggested Citation