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Privatization, Soft Budget Constraint, and Social Burdens: A Random-Effects Stochastic Frontier Analysis on Chinese Manufacturing Technical Efficiency

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  • Gao, Song

Abstract

Traditional panel stochastic frontier studies on privatization of Chinese State-owned firms face a major challenge, namely, the endogeneity problem. The endogeneity problem is present because decision-making process of privatization in China is very likely influenced by some unobserved characteristics of a firm. In particular, better-performing SOEs are more likely to be chosen for privatization because the local governments may have incentives to attract private investors or to retain momentum for future reform. To deal with this challenge, this paper proposes a two-step stochastic frontier model. The first step addresses the endogeneity issue by estimating the probability of privatization with a random effects probit model. The second step estimation investigates the causes of Chinese manufacturing’s inefficiency with a random-effects stochastic frontier model. The estimation results suggest that privatization, hardening budget constraint and reducing firms’ social obligations have significantly contributed to the improvements of firms’ efficiency. However, no evidence is found that more autonomy for managers and lower debt asset ratio may help improve firms’ efficiency.

Suggested Citation

  • Gao, Song, 2010. "Privatization, Soft Budget Constraint, and Social Burdens: A Random-Effects Stochastic Frontier Analysis on Chinese Manufacturing Technical Efficiency," MPRA Paper 24765, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:24765
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    References listed on IDEAS

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    4. Dong, Xiao-yuan & Putterman, Louis & Unel, Bulent, 2006. "Privatization and firm performance: A comparison between rural and urban enterprises in China," Journal of Comparative Economics, Elsevier, vol. 34(3), pages 608-633, September.
    5. Pitt, Mark M. & Lee, Lung-Fei, 1981. "The measurement and sources of technical inefficiency in the Indonesian weaving industry," Journal of Development Economics, Elsevier, vol. 9(1), pages 43-64, August.
    6. Kai Guo & Yang Yao, 2005. "Causes of privatization in China," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(2), pages 211-238, April.
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    8. Shahid Yusuf & Kaoru Nabeshima & Dwight H. Perkins, 2005. "Under New Ownership : Privatizing China's State-Owned Enterprises," World Bank Publications - Books, The World Bank Group, number 7399.
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    More about this item

    Keywords

    Panel data; random effects; technical efficiency; stochastic frontier; privatization; soft-budget constraint; managerial incentives; social burdens;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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