Employment burden, government ownership and soft budget constraints: Evidence from a Chinese enterprise survey

This paper investigates two competing theories of soft budget constraint (SBC), namely the ownership hypothesis and the policy burden hypothesis. While the ownership hypothesis attributes the SBC problem to government ownership, the policy burden hypothesis predicts that privatization would not eliminate the SBC problem, as long as the major policy burden – maintaining employment – is not removed from enterprises. Using a panel dataset from a survey of Chinese enterprises, I conduct empirical tests on these two competing hypotheses. I explicitly address endogeneity and data-censoring problems by using instruments and estimating a two-step tobit model. The test results support the policy burden hypothesis but not the ownership hypothesis. My finding emphasizes the importance of creating a sound social security system in the process of China's enterprise reform.