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Sources of Investment Inefficiency: The Case of Fixed-Asset Investment in China

Author

Listed:
  • Duo Qin

    (Queen Mary, University of London)

  • Haiyan Song

    (Hong Kong Polytechnic University)

Abstract

This study attempts to measure the inefficiency associated with aggregate investment in a transitional economy. The inefficiency is decomposed into allocative and production inefficiency based on standard production theory. Allocative inefficiency is measured by disequilibrium investment demand. Institutional factors are then taken into consideration as possible explanatory variables of the disequilibrium. The resulting model is applied to Chinese provincial panel data. The main findings are: Chinese investment demand is strongly receptive to expansionary fiscal policies and inter-provincial network effects; and although there are signs of increasing allocative efficiency, the tendency of over-investment remains, even with improvements in production efficiency.

Suggested Citation

  • Duo Qin & Haiyan Song, 2007. "Sources of Investment Inefficiency: The Case of Fixed-Asset Investment in China," Working Papers 584, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:584
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    More about this item

    Keywords

    Over-investment; Efficiency; Disequilibrium; Soft-budget constraint;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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