Hayek, Local Information, and Commanding Heights: Decentralizing State-Owned Enterprises in China
77 Pages Posted: 15 Feb 2017 Last revised: 3 Mar 2017
Date Written: February 14, 2017
Hayek (1945) argues that local information is a key to understanding the efficiency of alternative economic systems and whether production should be centralized or decentralized. The Chinese experience of decentralizing SOEs confirms this insight: when the distance to the government is farther, the SOE is more likely to be decentralized, and this distance-decentralization link is more pronounced with higher communication costs and greater firm-performance heterogeneity. However, when the Chinese central government oversees SOEs in strategic industries, the distance-decentralization link is muted. We also consider alternative agency-cost-based explanations, and do not find much support.
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