Collusion and Economic Growth: A New Perspective on the China Model

Economic and Political Studies Vol. 1, No. 2, January 2013, 18-39

21 Pages Posted: 13 Jun 2013 Last revised: 14 Jun 2013

See all articles by Huihua Nie

Huihua Nie

Renmin University of China - School of Economics

Jinbo Li

Guanghua School of Management, Peking University

Date Written: June 12, 2013

Abstract

In this paper, we propose a political-economy model of China that explains both the rapid economic growth and frequent rate of accidents that have occurred in China. The central government delegates authority to the local government to regulate the production activities of the firm. Under information asymmetry, the local government can collude with the firm and choose “bad” technology, the use of which will lead to faster economic growth and more accidents than the use of “good” technology. We characterize optimal equilibrium within collusion contracts, under which the central government will allow collusion when the cost to eliminate collusion is high. We also characterize the optimal collusion-proof contract, under which the payments, reprimands, and taxes that take place between the local government and the firm are endogenously determined. Our predictions on collusion and growth are supported by an empirical study on the coal industry.

Keywords: economic growth, China model, local government, collusion

JEL Classification: D82, H73, O12, P28

Suggested Citation

Nie, Huihua and Li, Jinbo, Collusion and Economic Growth: A New Perspective on the China Model (June 12, 2013). Economic and Political Studies Vol. 1, No. 2, January 2013, 18-39. Available at SSRN: https://ssrn.com/abstract=2278735

Huihua Nie (Contact Author)

Renmin University of China - School of Economics ( email )

59 Zhongguancun St., Haidian
School of Economics, RUC
Beijing, Beijing 100872
China

HOME PAGE: http://www.niehuihua.com

Jinbo Li

Guanghua School of Management, Peking University ( email )

Beijing 100871, Beijing
China

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