Rational Entrepreneurship in Local China: Exit Plus Voice for Preferential Tax Treatments

38 Pages Posted: 26 Aug 2006

See all articles by Ze Zhu

Ze Zhu

Erasmus Research Institute of Management (ERIM)

George W.J. Hendrikse

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Erasmus Research Institute of Management (ERIM)

Barbara Krug

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Erasmus Research Institute of Management (ERIM)

Date Written: March 10, 2006

Abstract

Bearing the legacy from central-planned system, the tax system in local China still lacks transparency and, in many cases, the liabilities of firms, especially those with extensive influences, are subject to negotiation despite the new tax-reform 1994. Applying Hirschman’s Exit-Voice theory, we construct a game model of interplay between firm and local government, in terms of exit and voice for preferential tax treatments, thereby revealing dynamics of these two options under rational entrepreneurship of economizing transaction cost. Suggested by the model, exit not only induces firm to opt for voice, it also underpins firm’s voice that forces local government to compromise. Particularly, when holding private information of exit cost, firm is able to mimic behaviors of those with high mobility so as to boost the effectiveness of voice. The empirical cases fully illustrate such rational entrepreneurship of exit plus voice to profit from local preferential policy.

Keywords: China, Exit, Preferential Tax Treatments, Tax Competition, Voice

Suggested Citation

Zhu, Ze and Hendrikse, George W.J. and Krug, Barbara, Rational Entrepreneurship in Local China: Exit Plus Voice for Preferential Tax Treatments (March 10, 2006). ERIM Report Series Reference No. ERS-2006-010-ORG. Available at SSRN: https://ssrn.com/abstract=902739

Ze Zhu (Contact Author)

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
Department of Organization & Personnel Management
3000 DR Rotterdam
Netherlands
+31 10 408 2261 (Phone)
+31 10 408 9015 (Fax)

George W.J. Hendrikse

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Barbara Krug

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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