Government as a Discriminating Monopolist in the Financial Market: The Case of China
37 Pages Posted: 6 Sep 2001
Date Written: June 2001
We show that the many unusual features of China's financial markets are consistent with a government choosing regulations to maximize a standard type of social welfare function. Under certain conditions, these regulations are equivalent to imposing explicit taxes on business and interest income, yet should be much easier to enforce. The observed implicit tax rates are broadly inline with those observed in other countries. The theory also forecasts, however, that China will face increasing incentives over time to shift to explicit taxes.
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