| Publication |
2009.
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| Summary/Abstract |
This paper applies a common-agency model to demonstrate why recent enterprise reforms that assign the State Asset Supervision and Administration Commission (SASAC) a greater role in running China's state-owned enterprises (SOEs) are apt to fail. In a theoretical framework, we show that local principals' incentive payments are likely to clash with those of SASAC as local SOE principals' promote social stability and SASAC bolsters SOE efficiency. A second-best outcome requires a social planner to restrict actions by local principals and to impose taxes/subsidies to address inter-principal externalities. In the long run, the simplest solution is to privatize SOEs and find a public-sector funding source for promoting social stability.
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