Technology accessibility and the local government's incentive to aid zombie firms in China

Abstract

AbstractWe develop an open‐city model in which the incentive for a local government to shut down zombie firms depends on the capacity of the most efficient firms in the city to re‐employ the displaced workers in competition with the efficient firms in other cities. The model predicts that the local government has a greater incentive to shut down zombie firms when the city has better access to technology that enables the efficient firms to expand and re‐employ displaced workers. Data from Chinese cities validate the prediction. Our developed model adds to the understandings of governments' roles in China's zombie firm problems and provides a more feasible solution for reducing zombie firms.