Implications of interjurisdictional competition in transition: The case ofthe Chinese tobacco industry

Using theoretical models and evidence from the Chinese tobacco industry, we maintain that while interjurisdictional competition plays an important rol e in breaking up state monopolization and promoting market competition in a transition economy, it may also induce governments to impose trade restric tions to protect local firms, especially when market competition threatens the governments' revenues from these firms. We also show that governments t end to provide more subsidies or protection to less-efficient firms, regard less of whether the governmental actions are pro or anti market competition . As a result, there are striking differences in efficiency and performance across jurisdictions in the tobacco industry. Finally. we discuss conditio ns under which the governments may or map not phase out their involvement i n businesses when the market becomes more competitive. J. Comp. Econ.,March 2001, 29(1),pp. 158-182. Western Michigan University, Kalamazoo, Michigen 49008-5023. (C) 2001 Academic Press.