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A Refinancing Model of Decentralization with Empirical Evidence from China

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  • Albert Park
  • Minggao Shen

Abstract

Decentralization can complement market liberalization by strengthening incentives of agents to exploit local information in response to market signals. In China, however, banks centralized lending authority following financial reforms in the mid-1990s. We offer a new theory of financial decentralization in which centralization provides a credible commitment not to refinance bad projects by reducing available information. Using data from Chinese rural financial institutions, we empirically assess the determinants of decentralization and the likelihood of collateral seizure, strongly confirming the predictions of the refinancing model. We conclude that the inability of financial systems to exploit local information in weak institutional environments may limit the efficiency of financial intermediation despite financial market liberalization.

Suggested Citation

  • Albert Park & Minggao Shen, 2002. "A Refinancing Model of Decentralization with Empirical Evidence from China," William Davidson Institute Working Papers Series 461, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2002-461
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    Cited by:

    1. Minggao Shen & Jikun Huang & Linxiu Zhang & Scott Rozelle, 2010. "Financial reform and transition in China: a study of the evolution of banks in rural China," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(3), pages 305-332, November.
    2. Shih, Victor & Zhang, Qi & Liu, Mingxing, 2007. "Comparing the performance of Chinese banks: A principal component approach," China Economic Review, Elsevier, vol. 18(1), pages 15-34.

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    More about this item

    Keywords

    banking; decentralization; refinancing; transition; China;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions

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