Decentralization, incentives, and asset ownership

Abstract

This paper develops a model to explain why mass privatization can become troublesome when taking into account asymmetry of information and economies of scale. It also shows that, in early stages of reforms, organizational form is irrelevant, but cooperation among the contractual parties is necessary for efficiency. We then incorporates repeated-game framework into the model to study how property rights are gradually formed in China and how informal social mechanisms work to promote cooperation. One distinct feature of China’s reforms is the contingent devolution of power: local firms and agencies are offered a high degree of autonomy for achieving cooperation and high investment. Such a contingent delegation combined with capital mobility creates market booms within the old regime. Later, this regime is gradually replaced by a new ownership structure.