Soft Budget Constraint, Strategic Delegation and Overcapacity of Chinese SOE

Abstract

Overcapacity has become a major obstacle to the healthy development of China’s economy in recent years. Using a mixed oligopoly competition model, this paper studies how the government soft budget constraint and strategic delegation for State-Owned Enterprise (SOE) impact the capacity choice of SOE and private enterprise. Theoretical analysis shows that: 1) Generally, SOE tends to have excess capacity, while private enterprise tends to have undercapacity; 2) The government soft budget constraint and strategic delegation to SOE will not only aggravate the overcapacity of SOE, but the undercapacity of private enterprise. Based on the theoretical analysis, this paper puts forward policy recommendations on the issue of overcapacity for some industrial sectors in China.