The Effects of Reforming the Chinese Dual-Track Price System

duces its welfare. Without resale, transitional policy has no effect on the welfare
of a type-2 household; but with resale, since transitional policy causes the market
price to go down, the welfare of a type-2 household rises. When the DTP system
is being transformed toward a the full market economy, it creates both winners
and losers, in terms of welfare.

This is a striking comparison to Lau et al. (1997, 2000), who consider an
economy in which the existing plan-track obligations must still be fulfilled, so that
rents implicit in the plan are maintained, but agents are free to produce and trade
at the margin, thereby creating the opportunity for Pareto gains. In contrast,
in our analysis the value of lump-sum transfers from suppliers to consumers is
endogenously determined, so that the value of rents is not maintained. Thus, the
reform from DTP to a fully market economy is not Pareto improving. Since the
potential loss of rents may generate opposition, this suggests that the latter stage
of reform may involve political problems that are not present in the earlier stage.

4 Conclusion

In this paper we formulate a rigorous microeconomic model of the DTP system for
households. We use this model to analyze ‘transitional policy,’ which we charac-
terize as a reduction in the plan-track quantity and a rise in the plan-track price.
We identify three different price indices for DTP goods: the plan-track price, the

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