Implementation of socially optimal outcomes in the liquidation of public enterprises in China |
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| Institution: | 1. School of Economics and Management, Inner Mongolia University, Hohhot 010021, China;2. College of Business Administration, University of Rhode Island, Kingston, RI 02881, United States;3. Lingnan (University) College, Sun Yat-Sen University, Guangzhou 510275, China;1. Smeal College of Business, The Pennsylvania State University, 381 Business Building, University Park, PA 16802, USA;2. Department of Finance, National University of Singapore, Singapore;3. J. Mack Robinson College of Business, Georgia State University, USA;1. School of Economics, Shandong University, No. 27 Southern Shanda Road, Jinan 250100, Shandong, China;2. School of Finance, Renmin University, No. 59 Zhongguancun Street, Haidian District, 100826 Beijing, China;1. School of Public Affairs and China Academy for Rural Development, Zhejiang University, China;2. National School of Development and China Center for Economic Research, Peking University, China;3. National Academy of Development and Strategy, Renmin University of China, China |
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| Abstract: | The authors study an optimal cost-sharing scheme between the central and local governments in China's current process of dissolving public firms through mergers and bankruptcies. They first define the social choice rule that minimizes social costs, then design a mechanism that both implements this rule truthfully under imperfect information and minimizes the central government's payment. Collusion between the local government and local firms as well as competition among local firms are explored. The findings show that writing off the bad loans and hardening the budget constraint are two necessary conditions to provide right incentives for truthful revelation. This result is consistent with the predictions of other theories and some recent proposals of revitalizing the banking system and the state sector in China. |
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