Insecure Property Rights and Government Ownership of Firms

We develop a theory of the ownership of firms in an environment without secure property rights against state encroachment. “Private ownership” leads to excessive revenue hiding, and “state ownership” (i.e., national government ownership) fails to provide incentives for managers and local governments in a credible way. Because “local government ownership” integrates local government activities and business activities, local government may better serve the interests of the national government, and thus local government ownership may credibly limit state predation, increase local public goods provision, and reduce costly revenue hiding. We use our theory to interpret the relative success of local government-owned firms during China's transition to a market economy.