The Effects of Reforming the Chinese Dual-Track Price System



Differentiating (12) and combining it with the Slutsky equation (3) for each type
of household yields

dp = αxχm :

(13)

(14)


dp

dp      -α(p p)x1m

dx         

where

= αS +(1α)Sxm(xs αx))(1α)x (xm xm)xsp.   (15)

If x1 x2 and xs αx)0, then, given that S1 0 and S2 0, we have 0.

mm

Since both types of household face the same market price p, the condition
x1m x2m holds for many common specifications of preferences. Thus, homothetic
and quasi-homothetic preferences with linear Engel curves have
x1m = x2m. Fur-
thermore, much of DTP has been of necessities - for example, many foods and
housing. To the households employed in the non-state sector
, without the direct
allocation from the plan-track, those goods may be considered more as luxuries
compared to the households with government subsidy, who pay less for those goods
in money terms. Therefore, we view
x1m <x2m as a reasonable assumption, reflect-
ing a concave Engel curve.
αx) is the total ration allocated by the central planning
system, which is part of the total supply of
X . This gives our next proposition.

21



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