The Partial Reform Equilibrium of China’s Large SOEs: Theory and Evidence

39 Pages Posted: 28 Dec 2017 Last revised: 3 Jun 2019

See all articles by Jim Huangnan Shen

Jim Huangnan Shen

University of London, School of Oriental and African Studies (SOAS), Economics; Center for International Development, Harvard Kennedy School, Harvard University

Weiping Li

City University of Hong Kong

Jun Zhang

Fudan University - China Center for Economic Studies (CCES)

Gary H. Jefferson

Brandeis University - International Business School

Date Written: October 14, 2018

Abstract

This paper uses a Nash bargaining framework to model the causes of the partial reform equilibrium syndrome that characterizes China’s state sector. The model demonstrates the nature of the bargain between the principals (i.e., officials from China’s State Asset Council) and the agents (large-SOE managers). We derive an indifference payoff point, which maximizes payoffs for both parties without the privatisation of SOEs. Once such payoffs are achieved, further institutional change including the further decentralization of managerial control or ownership reform may generate no better benefits for either party in the game. This condition helps to explain the inability of China’s political economy system to privatize meaningfully China’s large-SOEs for the sake of improving efficiency. In this context, we argue that the power sharing between the officials from the State Asset Council and the large-SOE managers is crucial to understanding why there may be limited progress with SOE reform in the foreseeable future. We find that the model and hypotheses developed in the paper are broadly consistent with the relevant empirical evidence.

Keywords: partial equilibrium syndrome, Nash bargaining, indifference payoff point, privatization, state asset council, mega-SOE managers

JEL Classification: D86, L13, P20, P26, P31

Suggested Citation

Shen, Jim Huangnan and Li, Weiping and Zhang, Jun and Jefferson, Gary H., The Partial Reform Equilibrium of China’s Large SOEs: Theory and Evidence (October 14, 2018). Available at SSRN: https://ssrn.com/abstract=3092373 or http://dx.doi.org/10.2139/ssrn.3092373

Jim Huangnan Shen (Contact Author)

University of London, School of Oriental and African Studies (SOAS), Economics ( email )

London, WC1E 7HU
United Kingdom

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Weiping Li

City University of Hong Kong ( email )

Tat Che Avenue
Hong Kong
Hong Kong

Jun Zhang

Fudan University - China Center for Economic Studies (CCES) ( email )

China

Gary H. Jefferson

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

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