BARRIERS TO EFFICIENCY AND THE PRIVATIZATION OF TOWNSHIP-VILLAGE ENTERPRISES

function V (π1, π2, Y, L). We assume V is nondecreasing and strictly concave in each of its
arguments.

Usually the LG signs a managerial contract with the TVE manager that ties manager
compensation to output and profit levels (Whiting, 1996), suggesting the LG likely influences
TVE production choices. Also, a survey conducted by Raiser (1997) suggests LGs induced
over 16 per cent of the TVEs to meet minimum labor hiring goals. In what follows we assume
the LG has some but different influence over the output choice or hiring decisions of the PE
and TVE. Also, we assume the local government exerts some but different effort in securing
loans for the PE and TVE. Then, under such assumptions the LG optimization problem is
given by:

^,... , . . ,,,

V(l*,Y *,I ) = max {V [π₁ (E₁ (I ) ,Y1,l1) , ∏2(E2 (I ) ,Y2,l2),l1 + l2,Y1 + Y2] (3)

e1 ,e2,l1,l2,Y1,Y2

-C¹ (Ei (I) ,Yi - Y*,l₁ - l*) - C² (E₂ (I) ,Y₂ - Y2*,l2 - l*)
subject to Y₁ - Y₁* ≥ 0, l₁ - l* ≥ 0,Y₂ - Y₂* ≥ 0, l₂ - l* ≥ 0} .

Here, C^j (Ej,Y∙ - Y*,l_j∙ - l*) is the effort cost to the LG of raising E_j∙ in loans for firm j,
while inducing the firm to produce Yj units of output and hire lj employees. We assume C^j
is non-decreasing and convex in each of its arguments, and for all (e, l, Y) ,C¹ (E, l, Y) <
C² (E, l, Y) and C_i¹ (E, l, Y) <C_i² (E, l, Y) ,i=2, 3. The assumptions on C¹ and C² imply
that compared with TVEs, inducing PEs to choose output targets or minimum employment
levels is more difficult/costly for the LG.

The solution to (3), denoted EË,, lɪ, Y1, E₂, l2, Y₂ ) , might involve output-targets and min-
imum employment goals that are inconsistent with profit maximization. Also, depending on
the institutional regime I, LG efforts might result in loan amounts where ∕T'∣ = E₂. The prior
discussion would suggest that before 1994 E₁ might be larger than E^2, but post-1994 this
might not be the case.

Since no well-defined theoretical framework is used to specify the structural and be-

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