Contingent delegation and ambiguous property rights: The case of China's Reform

Ambiguous property rights may allow a local entrepreneur to get the services provided by local bureaucrats at lower costs compared with strong property rights. However, once local bureaucrats learn the firm's unobservable income, they likely encroach upon the firm. In an ongoing relationship, such predatory behaviour may be limited if local bureaucrats care enough about future returns. If, however, they are not sufficiently forward-looking, contingent delegation from the central government can prove as a useful mechanism. Under this policy, local bureaucrats must compete to gain more autonomy on the local economy's performance. If the expected gain from competition is sufficiently large, it may be incentive compatible for the capable local bureaucrats to enhance local firms, despite the fact that incapable ones may shirk. For these shirkers, the centre continues to regulate their activities as if they were under the central planning regime. This leads to a slow and uneven pace of reform across regions. Compared with a rapid and large-scale reform such as the one implemented in the former Soviet Union this policy may seem backward, yet has served reasonably well to solve some incentive problems in the reform, including the central dilemma: the local agencies blame the centre for lack of autonomy; and the centre blames them for lack of accountability.