Chinese villages and townships as industrial corporations: Ownership, governance, and market discipline

Public firms in a reforming socialist economy face two problems: the old so ft-budget constraint syndrome and new principal-agent problems. China's tow nship-village government-owned enterprises (TVEs) outperform state-owned en terprises (SOEs) in growth rate and productivity. Three explanations are pr oposed in the literature: (1) TVEs represent informal or ambiguous private property rights, which are most efficient in partial reform. (2) The small size and scale of township-village governments as industrial corporations a llows officials to monitor TVEs directly and to limit their wherewithal for cross-subsidizing. (3) Strict market disciplines facing TVEs render indire ct market monitoring to mitigate agency problems effectively. Analyses of J iangyin data show that (a) while both superior to local SOEs, village and t ownship enterprises share similar productivity and (b) the scale of townshi p-village corporations slightly increases productivity. I conclude that loc al state corporatism should be revised to include market discipline as an e ffective governance mechanism.