Toward a Theory of Internal Governance Structure of China’s large SOEs

51 Pages Posted: 7 May 2019 Last revised: 4 Mar 2020

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

Jun Zhang

Fudan University - China Center for Economic Studies (CCES)

Chien-Chiang Lee

Nanchang University

Weiping Li

City University of Hong Kong

Date Written: April 6, 2019

Abstract

This paper constructs a simple model to reveal the trade-off between decentralized and centralized governance structure of large state-owned enterprises (SOEs) in China. Our model shows that the delegation of decision making authority to SOE managers would enhance their initiative in terms of local investment while in meanwhile might lead to the ex-post moral hazard problem. The business empire building effect causes the misalignment between SOE managers’ personal interests and organizational interests as a whole. We introduce a mechanism so called constrained-delegation approach to illustrate the issues that by eliminating some of SOE managers’ empire building investment choices, the trade-off between centralization and decentralization with respect to the loss of control vs local initiative could be resolved. In the end of this paper, we also discuss the policy implications of such constrained-delegation organizational structure with particular reference to the rationale of the party-committee control within large SOEs in China.

Keywords: China; Large SOEs; The Business Empire Building Effect; Constrained Delegation; Party-Committee Control

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

Suggested Citation

Shen, Jim Huangnan and Zhang, Jun and Lee, Chien-Chiang and Li, Weiping, Toward a Theory of Internal Governance Structure of China’s large SOEs (April 6, 2019). Available at SSRN: https://ssrn.com/abstract=3368234 or http://dx.doi.org/10.2139/ssrn.3368234

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

Jun Zhang

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

China

Chien-Chiang Lee

Nanchang University ( email )

999 Xuefu Avenue
Hong Gu Tan New District
Nanchang, Jiangxi 330031
China
330031 (Fax)

Weiping Li

City University of Hong Kong ( email )

Tat Che Avenue
Hong Kong
Hong Kong

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