Decentralization in Financial Institutions: Theory and Evidence from China

46 Pages Posted: 28 Apr 2001

See all articles by Albert Park

Albert Park

University of Michigan at Ann Arbor - The William Davidson Institute; Harvard University - Fairbank Center for East Asian Research

Minggao Shen

Peking University - China Center for Economic Research (CCER)

Date Written: March 2001

Abstract

Decentralization facilitates more efficient use of local information but also can lead to agency problems and commitment failures. This paper develops simple models of a two-tier hierarchy (the center vs. the local) to study the optimal division of lending authority between central and local bank managers. Using a unique data set collected by the authors from a survey of rural financial institutions in China, we empirically assess the determinants of decentralization. We find that concerns over agency problems (collusion and government influence) and especially commitment failures (excessive refinancing) explain the recent trend toward centralization of lending authority. We conclude that the inability of financial systems to exploit local information in weak institutional environments may substantially limit the efficiency of financial intermediation despite financial market liberalization.

Keywords: Banking, decentralization, agency, refinancing, transition, China

JEL Classification: G2, D8, P3

Suggested Citation

Park, Albert Francis and Shen, Minggao, Decentralization in Financial Institutions: Theory and Evidence from China (March 2001). Available at SSRN: https://ssrn.com/abstract=268230 or http://dx.doi.org/10.2139/ssrn.268230

Albert Francis Park

University of Michigan at Ann Arbor - The William Davidson Institute ( email )

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Harvard University - Fairbank Center for East Asian Research

1737 Cambridge Street
Coolidge Hall 308
Cambridge, MA 02138

Minggao Shen (Contact Author)

Peking University - China Center for Economic Research (CCER) ( email )

Beijing, Beijing 100871
China
+86(10)62751475 (Phone)
+86(10)62751474 (Fax)

HOME PAGE: http://CCER.pku.edu.cn/

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