Abstract
Economists have used the mechanism of interjurisdictional competition to explain how decentralization affects the degree of property rights protection. This fails however to account for another significant question: In China, can the local decentralization from the provincial level to the prefectural (county) level be more effective in protecting the private property rights of investors, especially when goods and production factors cannot flow freely among regions? The social perspective of property rights can help answer this question. In this study, we find that within the governance structure of decentralization, the mechanism of vertical constraints is more significant than the mechanism of interjurisdictional competition in protecting the private property rights of investors. However, the effectiveness of the vertical constraints mechanism depends on the resistance costs of discontented investors. Decentralizing to the prefectural level, in comparison to the provincial level, lowers these resistance costs for investors while strengthening the mechanism of vertical constraints, thereby improving the degree of property rights protection for private investors.
Highlights
Property rights cannot be defined in terms of law or external rules, since they are socially constructed (Zhang 2003, 2005; Zhe and Chen 2004, 2005; Shen and Wang 2005; Liu 2003a; Cao 2008)
We show that the inference from the hypothesis is true, namely that the reason why the level of decentralization affects the degree of property rights is because it can influence investors’ resistance costs, thereby affecting the levels of restriction experienced by local officials
The social perspective of property rights is the process by which property rights and their results are defined from a public or societal viewpoint; this perspective does not exclude the influence of government
Summary
Property rights cannot be defined in terms of law or external rules, since they are socially constructed (Zhang 2003, 2005; Zhe and Chen 2004, 2005; Shen and Wang 2005; Liu 2003a; Cao 2008). The outcome of game equilibrium is a social construction and in addition to the law, which is only one influential element, includes other aspects such as the “widely accepted principle of fairness,” as well as the “impact” caused by interested parties, such as the number of people involved, the intensity of the appeal, and the level of violence. Sociologists have named these arguments of property rights protection as the “social perspective of property rights” (Cao 2008).. This paper is an academic endeavor to promote the approach of “the social perspective of property rights.”
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