What Causes the Partial Reforms of Mega-SOEs in China? - A Nash Bargaining Approach

Abstract

This paper uses a Nash bargaining framework to model the causes of the partial reform equilibrium syndrome that characterizes China’s state sector. The model demonstrates the nature of the bargain between the principals (i.e., officials from China’s State Asset Council) and the agents (large-SOE managers). We derive an indifference payoff point, which maximizes payoffs for both parties without the privatisation of SOEs. Once such payoffs are achieved, further institutional change including the further decentralization of managerial control or ownership reform may generate no better benefits for either party in the game. This condition helps to explain the inability of China’s political economy system to privatize meaningfully China’s large-SOEs for the sake of improving efficiency. In this context, we argue that the power sharing between the officials from the State Asset Council and the large-SOE managers is crucial to understanding why there may be limited progress with SOE reform in the foreseeable future. We find that the model and hypotheses developed in the paper are broadly consistent with the relevant empirical evidence.