INSECURE PROPERTY-RIGHTS AND GOVERNMENT OWNERSHIP OF FIRMS

We develop a theory of the ownership of firms in an environment withou t secure property rights against state encroachment. ''Private ownersh ip'' leads to excessive revenue hiding, and ''state ownership'' (i.e., national government ownership) fails to provide incentives for manage rs and local governments in a credible way. Because ''local government ownership'' integrates local government activities and business activ ities, local government may better serve the interests of the national government, and thus local government ownership may credibly limit st ate predation, increase local public goods provision, and reduce costl y revenue hiding. We use our theory to interpret the relative success of local government-owned firms during China's transition to a market economy.