The Effects of Reforming the Chinese Dual-Track Price System

The Effects of Reforming the Chinese

Dual-Track Price System*

John Bennett

Department of Economics and Finance, and Centre for Economic Development and
Institutions (CEDI), Brunel University, Uxbridge, Middlesex, UB8 3PH; e-mail:
[email protected]

Huw Dixon

Cardiff Business School, Aberconway Building, Colum Drive, Cardiff, CF10 3EU; e-
mail [email protected]

Helen X.Y. Hu

Department of Economics, University of Birmingham, Birmingham B15, 2TT; e-mail:
[email protected]

23 July, 2008

Abstract

We formulate a microeconomic model of the dual-track price system for households
and use it to analyze ‘transitional policy’ reforms, which we characterize as a rise in
the plan-track price and a reduction in the plan-track quantity. Each of these reforms
has a negative effect on market price, but a positive effect on the weighted average
price (CPI). When households are homogeneous, transitional policy reform reduces
welfare (if profits are not fully distributed). Under fairly mild assumptions, if
households are heterogeneous and resale of goods can occur, transitional policy
reform creates losers (state employees) as well as winners (non-state employees).

JEL Classification: P22, D11

Keywords: dual-track pricing; China

* We are grateful to Guy Liu and to the participants at the Chinese Economic Association (UK) Annual
Conference, Cambridge, April 2008, for helpful comments.

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