Implications of Interjurisdictional Competition in Transition: The Case of the Chinese Tobacco Industry

Abstract

Using theoretical models and evidence from the Chinese tobacco industry, we maintain that, while interjurisdictional competition plays an important role in breaking up state monopolization and promoting market competition in a transition economy, it may also induce governments to impose trade restrictions to protect local firms, especially when market competition threatens the governments' revenues from these firms. We also show that governments tend to provide more subsidies or protection to less-efficient firms, regardless of whether the governmental actions are pro or anti market competition. As a result, there are striking differences in efficiency and performance across jurisdictions in the tobacco industry. Finally, we discuss conditions under which the governments may or may not phase out their involvement in businesses when the market becomes more competitive. J. Comp. Econ., March 2001 29(1), pp. 158–182. Western Michigan University, Kalamazoo, Michigan 49008-5023. Copyright 2001 Academic Press.Journal of Economic Literature Classification Numbers: P31, H32, L13.