Title: Divergent Interests between Central and Local Governments: Testing Theories of Public Ownership
Reference Number: 1143
Publication Date: September 2005
JEL Classifcation: D23, H7, L2

Chong-En Bai
Tsinghua University and The University of Hong Kong

Jiangyong Lu
Tsinghua University

Zhigang Tao
The University of Hong Kong

There are two main theories about the costs and benefits of public ownership: the efficiency theory that public ownership is a means for government to achieve its social objectives and the political patronage theory that public ownership is used by government officials to pursue their personal gains. The latest development of the efficiency theory emphasizes that state-owned enterprises engage in multiple tasks and one of the tasks has externalities. This theory implies that the incentives for privatization depend on the level of the government. Using a panel data set of 26,153 state-owned enterprises in China from 1995 to 1997, this paper tests this as well as other implications of the two main theories of public ownership and finds strong support for the efficiency theory, especially the multi-task efficiency theory, but mixed support for the political patronage theory.

Key words: multi-task efficiency theory of public ownership, political patronage theory of public ownership, divergent interests of local and central governments, privatization

Last modified: 09/06/2005