BARRIERS TO EFFICIENCY AND THE PRIVATIZATION OF TOWNSHIP-VILLAGE ENTERPRISES

The above observations suggest that institutional factors could have influenced the rel-
ative economic performance of TVEs and private enterprises, and hence offer explanations
for why private enterprises eventually emerged as the dominant institution for allocating re-
sources in post-1994 China. Qian (1999) and others suggest pre- and post-1994 institutions
might have influenced TVE and private enterprise: access to credit, technology adoption,
input allocation efficiencies, and forced inefficient output/labor decisions. In what follows we
outline a simple procedure for uncovering evidence of relative advantages and disadvantages
offered TVEs and private enterprises in the first- and second-stages of China’s economic
reform periods. Specifically, we define profit and revenue based measures of overall tech-
nical efficiency, and decompose the measures into components that highlight the existence
of credit constraints, output target constraints, labor hiring constraints, and evidence of
allocative inefficiencies.

2SimpleModel

Before developing a formal model, we feel it is instructive to discuss briefly the structure of a
typical rural community in China. The economic agents in rural China can be conveniently
divided into four major groups: TVEs, private enterprises (PEs), farmers, and local govern-
ments (LGs). In what follows we assume TVEs and PEs both produce the same composite
good using labor, physical capital, and intermediate inputs. Furthermore, we assume TVEs
and PEs have the same technology, and assume that physical capital is a fixed input..

The rural economy in question consists of four representative agents: a single representa-
tive farmer, a TVE, a PE, and a LG. We assume the central government chooses the set of
institutional reforms, and the institutional reforms influence the banks’ (LG) loan decisions
and the LG’s preferences. For example, banking reforms that transform government banks
into commercial banks are typically accompanied by a shift in the lending preferences of the

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