Insecure Property rights and Government Ownership of Firms

Abstract

China's remarkable economic growth occurred despite (1) the lack of rule of law to secure property rights against state encroachment; and (2) government ownership of most new and successful non-state firms. We develop a theory of ownership under state predation that incorporates these two considerations. In our theory, "private ownership" leads to excessive revenue hiding and "state ownership" fails to provide incentives for managers and local governments in a credible way. In contrast, "local government ownership" integrates local government activities and business activities together, which may not only provide incentives for local governments, but also involves less revenue hiding from the local government and less predation from the state. Furthermore, ownership diversity across localities and within a locality is possible. Our theory is consistent with empirical evidence from China. We thus interpret local government ownership as an organizational response to imperfect state institutions.