The Effects of Reforming the Chinese Dual-Track Price System

3 Heterogeneous Households

We now drop the assumption that households are homogeneous, for we can then
allow for the possibility of resale. Resale of agricultural products emerged in
the late 1980s, though it has never been officially recognized. A common sight
then was the man with a bicycle wandering in cities, buying official coupons for
food and clothes at a lower price and selling them back to state supply agents at
the government issue price. However, resale has been heavily regulated in some
markets, such as foreign exchange (Jaggi et al., 1996) and there are some products,
such as housing, for which resale has not been not commonly practiced.

For simplicity, we assume that there are no effective legal restrictions or other
frictions on resale. Commodity X therefore exchanges in the resale market at
the market-clearing price p. Rather than allowing a continuum of types, we focus
on a case of particular relevance to the Chinese economy. There are two types
of household in the model, which we index by the superscripts 1 and 2. The
proportion α of urban residents is assumed to employed in the state sector (type-1
households), while the proportion 1 - α comprises residents employed in the urban
non-state sector (type-2 households).¹³ A type-1 household is allocated a plan-
¹³For simplicity, we exclude the ‘floating population’ of rural workers unofficially inhabiting
urban areas. Although there has been some relaxation of the Chinese household registration
(hukou) system since the late 1990s, it is still very difficult for rural workers without urban
citizenship to find a stable job in urban area. So the wage rate differs significantly between
floating urban residents and permanent urban residents. Brooks and Tao (2003) show that the
percentage of permanent urban residents employed in state units, which we represent by α in
this paper, was 67.0, 73.0, 76.4 and 43.9, in 1980, 1990, 1995, and 2000 respectively.

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