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2024 | OriginalPaper | Chapter

2. Socialist Government and Enterprise: An Analysis from the Perspective of “Exit”

Author : Jun Zhang

Published in: Reform, Transformation and Growth

Publisher: Springer Nature Singapore

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Abstract

This chapter examines the relationship between socialist governments and enterprises through the lens of contract theory and game theory. It introduces the concept of 'exit' as a strategic measure to enforce contracts and maintains efficiency in state-owned enterprises. The author discusses the theoretical frameworks of property rights, implicit contracts, and game theory, highlighting the work of economists like Zhang Wuchang and Lin Yifu. The analysis focuses on the challenges of enforcing contracts in socialist economies and the role of 'exit' in addressing these challenges. The chapter also explores the implications of the 'exit' strategy for economic reform and the efficiency of state-owned enterprises, providing a comprehensive and insightful perspective on the topic.

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previous chapter Information Costs, Limited Reasoning Ability and Simplifying Planning: A Theoretical Explanation of Traditional Chinese Planning Structure

next chapter Monetary Incentive and Property Rights Structure of Socialist Enterprises: China’s Experience

Mutual commitment could be seen as a bartering of rights, because once a commitment is made, the party involved has to give up certain rights.

Telser (1980).

Within the category of economics, Hirschman studied the “exit” (or “vote with one’s feet”) problem in his book Exit, Voice, and Loyalty. In the book, exit is a way to show preference. See: Hirschman (1970). In addition, in terms of the theory of industrial organization, Baumol and others, in their theory of contestable markets, highlight the theoretical significance of the potential possibility of “entering-exit” to maintain the contestability of a monopoly market. Zhang (1987).

Maybe there is an exception. In modern company theory, to protect one’s own property rights by “exit” on the part of a shareholder and prevent the transferable shares caused by the divergent behavior of the company agents is greatly emphasized.

Wiliamson (1985).

Williamson mentioned this point when comparing the theoretical difference between “transaction cost economics” and Baumol’s “competitive market theory”.

Carmichael (1989).

Zhang Wuchang: Private Property Rights and Divided Tenancy (Chinese version), see Liu et al. (1991).

Kornai (1993).

For the definition ad meaning of the concept of “sub-game perfect equilibrium”, see: Fudenberg and Tirole (1991), or the introductory article written by Yang (1993).

I made a short review in my article: Echo of the Theory of Self-Enforcing of Contract: Comment on An International Debate on China's Agricultural Cooperatives and Agricultural Crisis (1959–1961), See Zhang Jun: Echo of the Theory of Self-Enforcing of Contract: Comment on An International Debate on China's Agricultural Cooperatives and Agricultural Crisis (1959–1961), in Economics News Daily, 1994–04-21.

Lin (1990).

S. Cheung, The Theory of Share Tenance, University of Chicago Press, 1969.

For this mathematical analysis and proof, see Zhang Wuchang: Private Property Rights and Divided Tenancy (Chinese version), and see: Liu (1991).

Zhang Wuchang: Private Property Rights and Divided Tenancy (Chinese version), see: Liu (1991).

In this sense, we may be able to further revise the following point of view which believes that under the current household contract responsibility system in rural China (which is actually a kind of divided system), the collective ownership of land failed to provide incentives for the long-term investment by farmers who leased the land, because under the collective ownership of land the expected earnings for farmers’ investment would be reduced. This view is correct only in the absence of a competitive market where land property rights transfer is permitted.

(Hungarian) Kornai (1986).

Article 12 of the Chinese Constitution stipulates: “Socialist public property is inviolable. The state protects socialist public property and all organizations or individuals shall be prohibited from occupying or damaging the property of the state or the collective by any means.”

What is worthy thinking deeply is that when many scholars called for legislation to prevent the property of the individual and private economy from being violated, they failed to see that the property of the state-owned enterprises’ properties have not been effectively protected.

Di (1992).

Du and Guo (1992).

Granick (1987).

I made a brief analysis of the implicit “social contract” between the socialist countries and their citizens in Fragmented Theory about Social Contract, see Zhang (1993). For systematic theoretical books, see collections of papers edited by Lessnoff.

Hu (1992).

Schaffer (1989).

Kreps and Wilson (1982).

From the angle of economics of property rights, there exists an “externality” in the relationship between the state and enterprises by the fact the state cannot exit: the state bears the “social costs” imposed by the company's “job rights”. For the general analysis of this type of externality, see Zhang (1993).

The concept of “ideology” was taken from North. See Douglass (1991).

Time preference rate is affected by many factors such as political structures, change of leaders, and even the personalities of main rulers. So, it is a complex problem to explain why there are differences in time preference rate in countries that are undergoing economic reforms.

Schmidt and Schnitzer (1993).

Fischer and Gelb (1991).

Fischer (1994).

I benefited from my discussions with Ms. Francis Perkins of Australian National University for this view.

Thank Dr. Yuan Zhigang for providing me with this argument.

Hinds (1990).

H. Carmichael, Self Enforcing Contracts, Shirking and Life Cycle Incentives, Journal of Economic Perspective, 1989, 3 (4), pp. 65-83.

S. Cheung, The Theory of Share Tenance, University of Chicago Press, 1969.

Di Na: The Hidden Losses of the State-Owned Enterprises are Shocking, in Economic Research Reference, 1992 (22), pp. 2 ~ 8.

Douglass C. North: Structure and Change in Economic History, Chen Yu, Luo Pinghua, et al. tr. Shanghai, Shanghai Joint Publishing Company Ltd., 1991.

S. Fischer, A. Gelb, The Process of Socialist Economic Transformation, Journal of Economic Perspective, 1991, 5 (4), pp. 91-105.

(U.S), S. Fischer: Socialist Economic Reform - Experience and Lessons of the First Three Years, in Comparison of Social and Economic Institutions, 1994 (3), pp. 30 ~ 34.

D. Fudenberg, J. Tirole, Game Theory, MIT Press, 1991

D. Granick, Job Rights in the Soviet Union, Their Consequences, Cambridge University Press, 1987.

Du Haiyan, Guo Jingang: Autonomy, Incentive Mechanism and Enterprise’s Efficiency and Behavior, in Economic Research Reference, 1992 (157), pp. 39-47.

M. Hinds, Issues, in the Introduction of Market Forces in Eastern European Economies, EMTTF, World Bank, 1990.

A. Hirschman, Exit, Voice and Loyalty, Harvard University Press, 1970

J. Kornai, The Evolution of Financial Discipline Under the Postsocialist System, KYKLOS, 1993, pp. 315–336.

Janos Kornai: Economics of Shortage, tr. Gao Hongye, Beijing: Economics Science Press, 1986.

D. Kreps, R. Wilson, Reputation and Imperfect Information, Journal of Economics, 1982, 27 (2).

J. Lin, Colectivization and China’s Agricultural Crisis in 1959–1961, Journal of Political Economy, 1990 98(6) pp. 1228–1252.

Liu Shouying et al: Property Rights and Institutional Changes, Shanghai: Shanghai Joint Publishing Company Ltd., 1991.

Hu Ruyin: Economics of Low Efficiency, Shanghai, Shanghai Joint Publishing Company Ltd., 1992.

M. Schaffer, The Credible Commitment Problem in the Center–Enterprise Relationship, Journal of Comparative Economics, 1989, 13 (3), pp. 359-382.

K. Schmidt, M. Schnitzer, Privatization and Management Incentives in the Transition Period in Eastern Europe, Journal of Comparative Economics, 1993 (2), pp. 264-287.

L. Telser, A Theory of Self Enforcing Agreements, Journal of Business, 1980, 53 (1), pp. 27-44.

O. Wiliamson, The Economic Institutions of Capitalism, Free Press, 1985.

Yang Xiaokai (Yang Xiaokai: New Development of Economics on the Basis of Theory of Countermeasures, in Finance Monthly, 1993 (3), pp. 83–86.

Zhang Jun: New Theory of Monopoly and Competition, in Collection of World Economy, 1987 (3), pp. 29–33.

Zhang Jun: Property Rights and Institutional Change Theory under the Centrally Planned Economy, in Economic Research, 1993 (5), pp. 72–72.

Zhang Jun: Echo of the Theory of Self-Enforcing of Contract: Comment on An International Debate on China's Agricultural Cooperatives and Agricultural Crisis (1959–1961), in Economics News Daily, 1994-04-21.

Title: Socialist Government and Enterprise: An Analysis from the Perspective of “Exit”
Author: Jun Zhang
Publisher: Springer Nature Singapore
Book: Reform, Transformation and Growth
Print ISBN: 978-981-9957-11-8

Electronic ISBN: 978-981-9957-12-5

Copyright Year: 2024
DOI: https://doi.org/10.1007/978-981-99-5712-5_2