State-owned enterprises and their contract with government in China: An econometric analysis

In this paper we attempt to investigate empirically the cause of inefficiency of Chinese state-owned enterprises in 1989-95, in the contract relation between Chinese government and state-owned enterprises. It is found that several moral hazards arose, in 1989-95 Chinese state-owned enterprises, in textile industry. To put it another way, the enterprises chose less private effort and risk than the first-best levels, because of the incentive structure designed by the government. Especially, concave payoff function to the enterprises designed by the government made them institutional risk averters and choose too little risks.