The Effects of Reforming the Chinese Dual-Track Price System

There is also a literature evaluating empirically the effects of DTP. Gao et
al. (1996) apply Chinese urban food demand data to a DTP model and show
that government subsidization of food for urban households led to an increase
in market demand, so that the market prices of staple foods were pushed up.
Similarly, Liew (1993) finds that government price controls on industrial products
increased costs of production, so that removal of these controls would have reduced
production cost and increased real national income, as well as diminishing the scope
for corruption. Li, et al. (2000) develop a micro-model of the partial privatization
of Chinese industries, and show that the decentralization of government control
was an essential factor in the rapid growth of private industry in China.

The analysis that we undertake is complementary to that of Lau et al., our
focus being the transition from DTP toward a market economy, rather than the
transition from planning to DTP. We develop a household demand model in the
presence of dual tracks, with allowance for endogenous determination of supply,
and we use this model to examine the effects of reducing the role of the plan track;
that is, of we consider the effects of raising the plan-track price and reducing the
plan-track quantity. To incorporate the resale of plan-track quantities into the
model, we assume that there are two different types of household: employees of
state-owned enterprises, who benefit from the plan-track subsidy, and the non-
state employees, all of whose purchases are at the market price. Under fairly mild

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