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Principal agent theory and private property rights in China's economic reform.

China's economic reforms over the past 30 years have been very successful. Gross domestic product has been growing at roughly ten per cent per year. The centrally planned economy has been transformed into a market economy. Although government intervention is still widespread, some industries in China are part of the most intensive competition in the world.

The miracle of China's success, in contrast with the relatively mediocre performance in Eastern Europe, has attracted scholarly attention. In the past, scholars observed forms rather than the essence. For example, in China the reforms were gradual rather than "big-bang"; agricultural reform preceded industrial reform, etc. Later, scholars investigated the institutional arrangements and proposed theories to explain China's success. For instance, the "local state corporatism" thesis, (1) "local governments as industrial firms" thesis, (2) "state entrepreneurialism" thesis where local governments constituted and coordinated the corporations, (3) "federalism" thesis, (4) "semi-federalist government" thesis (5) or "federalism, Chinese style" thesis, (6) "privatisation from below" thesis (7) or "privatisation and Chinese style" thesis (8) or "insider privatisation" thesis. (9)

Some scholars focussed on the reform of the state-owned enterprises (SOEs). They measured the changes in the performance of the SOEs after different reform measures such as the increase in managerial autonomy, (10) performance contracts, (11) modern enterprise system, (12) privatisation, etc. (13) The results were mixed. (14) Many theories or models were used to explain this. Examples were the multi-task theory, (15) competition, (16) policy burden (17) and soft budget constraint. (18) However, the most popular approach was the principal agent (PA) theory. This article demonstrates that the PA theory is not suitable for analysing China's public enterprises due to the enigmatic identity of the principals and the inability of deducing refutable hypotheses.

A noticeable difference between China and other transition economies was the growth of the non-state sector, notably the township and village enterprises (TVEs) in the 1980s. It is generally agreed that the growth of TVEs not only increased the size of the economy but also increased competition which substantiated and induced further reforms. Scholars diverge on the nature of TVEs. Numerous theories or models were adopted or proposed to explain the success and governance of TVEs. Examples included the "hybrid form" thesis, i.e., a form that falls between market and hierarchy, (19) the "vaguely defined cooperatives" thesis, (20) the "ambiguous property right" thesis, (21) the "insecure property right" thesis, (22) as well as the "double-sided moral hazard" model. (23) One primary reason for the divergent views on the identity of principals of the public economy and the nature of TVEs was the widespread misconceptions about the private property rights. This article reveals that the nature of TVEs is perfectly understandable if one has a correct concept of private property rights.

The main purpose here is to demonstrate that misconceptions in private property rights could lead to misleading views about enterprise reform in China. Given that China's transition experience is arguably the most important one in human history, a correct understanding of China's enterprise reform is vital to the understanding and development of institutional economics. The focus here is identification of the mistakes which could possibly bewilder future readers. Three interrelated areas are examined in detail: the merits of principal agent theory in explaining China's enterprise reform, the concept of private property rights and the nature of TVEs.

Applicability of PA Theory in China's Enterprise Reform

It has been popular to approach the issues of corporate governance in China's SOEs and TVEs with PA theory. PA theory has been widely used to analyse corporate governance in advanced capitalist economies. A PA relationship happens when a principal entrusts an agent to perform a certain task. There must be a subject, the principal, who shall be able to make decisions. Whether a state or a department could be the principal is doubtful, as both are merely concepts instead of decision-making persons. In addition, where the principal can entrust something to the agent, by definition, the principal to some extent has property rights. However, it is well-known that property rights were poorly defined at least in the early transition period of China's reform. Hence, there are a priori reasons to believe that PA theory is not suitable for analysing China's enterprise reform. One problem is the enigmatic identity of the principals. The other lies in the merit of the theory in deriving refutable hypotheses.

Who are the Principals?

In studies of corporate governance in China's public enterprises, researchers differed in identifying the principals and agents. Table 1 lists the PA relationships described by 17 articles on Chinese enterprises' corporate governance. Generally, researchers believed that the government or the state was the principal. (24) Indeed, Li and Wu made the generalised remark that "government agencies are principals". (25) This apparent contradiction is surprising, but it somehow reveals the difficulties in identifying the principals in the SOEs.

Some researchers distinguished government from government officials. Perhaps they were aware of the fact that principals should be able to make decisions. For instance, Chen and Rozelle (26) and Shirley and Xu (27) thought that "government officials", instead of "government" itself, were the principals. Lin and Zhu (28) did not distinguish "government" from "the people", claiming that "government (or the people)" was the first-tier principal, while "government bureaucrats" lied in the middle-tier who were both the agent to the first-tier principal and principal to the lower-tier agents. Likewise, Tylecote and Cai (29) and Zhou and Wang (30) thought that the "state" or "people" was the first-tier principal, but they distinguished the "state" from the "government", arguing that the "government" was the first order agent who in turn was the principal to lower order agents. Hence, two-tiered or multi-tiered PA relationships were introduced.

Even more complicated PA relationships have been discussed as well. For instance, Zhang presented a "dual hierarchical PA chain" consisting of an upward PA relationship and a downward PA relationship. (31) The former consisted of "residual claimants (co-owners) of the public economy" as principals and "central committee representing the whole community" as the agent, while the latter consisted of the central committee as the principal and "insider members of the firm" as the agent. Hence, the PA relationship of the public economy was "typically characterised by two 'macro' hierarchies".

The first hierarchy was formed via a delegation chain of power from the principals to the central committee. The second was formed via a delegation chain from the central committee to the insider members of the firms. Each player played two roles: he was the agent of the principal and the principal of the agent. The same author in one of his later papers introduced two other systems of PA relationship. (32) Zhang claimed that before the reform, there were two principals, namely, "ordinary citizens" as the "original principal", and the "central planners" as the "acting principals"; while "industrial bureau" served as both the agent to the acting principals and the principal to the lower tier agent which was the insider member of the firm. The author further described the situation after reform as one where there were two "legitimised principals", namely, the government and the insider members of the firm, and one "double-faced agent", namely, the industrial bureau. Unfortunately the introduction of such sophisticated systems of PA relationships did not help explain economic matters, as no refutable hypotheses could be deduced from these systems.

Instead of referring to either the government or the people, Cauley and Sandler argued that although "an SOE represents a multilevel organisation, for which principal agent interactions exist between each pair of hierarchical levels", the focal PA relationship should be between the manager as the principal and the workers as the agents. (33)

Researchers sometimes changed their minds. Examples were Zhang, (34) mentioned above and Shirley and Xu. (35) Shirley and Xu thought that "SOEs have no clear residual claimant" and "they are subject to many principals". (36) However, in their later work, they took "government officials" as the principal. (37)

The wide divergence in identifying who are the principals in the corporate governance of China's enterprises raises the question of whether the principals exist at all. Chang apparently noticed the problem of using the PA theory to explain corruption and pointed out that such a framework "presumed that the principal itself is not corrupt". (38) But why would the principal be corrupt? Applying the concepts of property rights, as encapsulated in Cheung's paper, "A Theory of Price Control", (39) the reason is either: (a) the principal is not the private property rights owner, or (b) the relevant property rights are not clearly defined. Indeed, Zhou argued that there was no principal in SOEs. (40) Hua et al. echoed this view and questioned that "who is really the 'state' and who represents it". (41) They argued that "the principal is invisible"; if all of China's citizens were considered principals, it would be "too dispersed and powerless to exercise and control over SOEs".

In contrast, the question as to who are the agents has been less controversial. Most researchers believed that the managers of the SOEs are the agents. (42) Others believed that employees of the enterprises are the agents. (43)

The wide divergence between the researchers' opinions on the identity of the principals of public enterprises is the most persuasive evidence that PA theory is not suitable for analysing the issues of corporate governance in China's public enterprises. Further evidence lies in the fact that no refutable hypotheses have been derived from the theory.

The Merit of PA Theory in Deriving Refutable Hypotheses

The merit of a theory lies in its capability to explain or predict human behaviours. In this regard, the PA theory has been very poor in explaining China's enterprise reform. Few refutable hypotheses have been decently deduced from the theory. This is revealed from a review of 15 articles that examined SOEs using the PA theory. Most (11) neither provided any refutable hypothesis nor tested one. (44) This is certainly not to say that these works themselves are of little merit. It is the merit of the PA theory which they used that is being challenged. Since these works did not clearly provide hypotheses, it is often difficult to prove whether there were any problems with the theory.

Nonetheless, some problems in their assumptions or definitions were found. For instance, Cauley and Sandler assumed that: Principal's wealth = agent's total effort + exogenous risk where "principal's wealth may stand for profit or output", if "prices are normalised to equal one, then there is no difference between profit and output". (45) There are two mistakes here. Certainly effort is not the only factor affecting wealth or profit. If doing a business is equivalent to making efforts only, then one could seldom go bankrupt if he makes sufficient effort. Secondly, output multiplied by price yields revenue, not profit.

As a second example, Zhang defined "degree of publicness" as the number of original principals and "the size of the public economy" as the number of public-owned enterprises. (46) These are clearly problematic. Based on this principal, if one shareholder sells all his shares to another shareholder, then the "publicness" of this company is reduced. Moreover, Zhang has assumed in the second definition that each and every enterprise is homogeneous.

By adding unrealistic assumptions or using arbitrary definitions, one may be able to deduce some propositions. However, this is of little value in explaining real world phenomena. For the present purpose of examining the merits of a theory, suffice it to say that a theory is of little use in terms of explaining human behaviour if it cannot deduce refutable hypotheses. As to the PA theory, the question remains as to whether the empirical works produced refutable hypotheses from the theory.

None of the four empirical studies successfully proved the merit of the PA theory in terms of explaining human behaviours. (47) The reasons could be that the results were mixed (48) or had refuted the theory, (49) or that the hypotheses were not well derived from the perspective of the PA theory. (50) Mixed-results should invalidate the theory as the prediction of a theory must guarantee making it useful.

Li and Wu examined the relative effectiveness of the ownership school of reform measures and the management school of reform measures. (51) The only hypothesis that was derived from the perspective of the PA theory was that "sharing profit with the manager will increase efficiency". The results were mixed, indicating that the PA theory may not be valid.

Shirley and Xu examined if and which of China's performance contracts improved productivity. (52) There were two major problems that could easily invalidate the PA theory. One was that it was unclear how the PA theory had led to the hypotheses. The other was that some of the findings actually refuted the PA theory. For instance, the authors asserted, without explanation, that bidding led to lower information asymmetry. Intuitively, bidding showed the commitment of the manager, which should mean that the shirking problem was less serious. However, the results showed that bidding did not increase productivity, thus refuting such a hypothesis. Also, performance bonding clearly showed a manager's commitment to making the shirking problem less serious. However, the results also showed that performance bonding did not increase productivity, thus refuting this hypothesis. The authors showed unwillingness to accept the results and attributed this to the weak enforcement of performance bonding, but produced no proof.

Mengistae and Xu claimed that the PA theory was supported by merely showing that the Chief Executive Officer's pay was correlated with enterprise performance. (53) The problem was that the existence of some correlation was not a refutable hypothesis, but a phenomenon. We do not know for sure what conditions changed to lead to such a phenomenon. Likewise, Xu claimed that the PA theory was supported by merely testing whether the advice suggested from the perspective of the PA theory was actually followed. (54) There was no test for whether or not the principal agent theory was applicable.

The PA theory originated from the Williamson school of thought in terms of "shirking" or "opportunistic behaviour". The shirking problem is actually the metering problems of input productivity and rewards. People shirk because their productivities and/or rewards are difficult or costly to measure. The latter is one type of transaction cost. Theoretically, the matter could be approached with either the PA theory or transaction cost methods. However, as it is difficult to measure shirking behaviour, it is difficult, if not impossible, to derive a refutable hypothesis. Measurement of input productivities and rewards are difficult too. However, it is possible in some cases to measure them. The use of a piece-rate contract is certainly one example where input productivities can be measured and priced.

Since I have not identified any work that successfully derives a refutable hypothesis, I doubt the merit of using the PA theory to explain China's enterprise reform. Of course this review is by no means exhaustive. It nonetheless reflects the limited merit of the PA theory in terms of deriving refutable hypotheses. However, whether this theory is applicable to corporate governance in advanced capitalist economies is beyond the scope of this paper.

Misconceptions of Private Property Rights

Definition of Private Property Rights

It has been generally agreed that private property rights are a bundle of rights. Cheung defined private property rights as three sets of exclusive rights that consist of (a) the exclusive right to use or decide how to use; (b) the exclusive right to receive income generated from the use of; and (c) the right to alienate the property. (55) The right to alienate the property includes "both the right to enter into contracts with other individuals and to choose the form of such contracts". These three sets of rights are referred to as "use right", "income right" and "alienation right", respectively, in the following text, although the former two are sometimes known as "control right" and "residual claim right" in the literature on firm or team production. For instance, Alchian and Demsetz argued that ownership of the classical firm is "the bundle of rights: (1) to be a residual claimant; (2) to observe input behaviour; (3) to be the central party common to all contracts with inputs; (4) to alter the membership of the team; and (5) to sell these rights". (56) If one generalises (2) and (4) sets of rights to "control right" and (3) to alienation right, then this bundle of rights was consistent with Cheung's definition. (57)

The importance of clearly delineating private property rights towards market transactions has been clearly demonstrated by Ronald Coase in his investigation of the Federal Communications Commission. (58) The idea that "delimitation of rights is an essential prelude to market transaction" was later known as one version of the Coase Theorem, while the importance of market transaction in improving economic welfare had been established since Adam Smith. Given the importance of delineating private property rights, which one of the three sets of rights is the most important in delineating property rights? Zhou (59) argued that one of the merits of the Coase

Theorem (60) was that it pointed out that whether the property rights were clearly delineated could be revealed during the alienation process. This was because alienation of a property inevitably involved some subjective estimation of the value of the property, while "subjective" meant there must be a subject (owner). Hence, alienation right is the most important one among the three in the study of the property rights issues in SOEs.

Surprisingly enough, many researchers have neglected the existence of alienation rights in their studies of China's enterprise reform. Some authors have even omitted two of the three sets of rights. Examples are Grossman and Hart, (61) Li et al. (62) and Zhang. (63) Some have "only" omitted one set of rights. Examples of omitting alienation rights are Che and Qian, (64) David D. Li, (65) Perotti et al., (66) W. Li (67) and Zhou and Wang, (68) while the work of Furubotn and Pejovich is one example of omitting income right. (69) In contrast to omission of rights, some thought nominal ownership per se was also decisive in determining private property rights. (70) Fortunately, there have been some correct definitions. Examples are Li et al., (71) Naughton, (72) Putterman, (73) Smyth (74) and Walder. (75) One implication of wrongly defining private property right lies in the divergent views about the principals.

Examples of Wrongly Defining Private Property Rights

Grossman and Hart defined ownership of the firm as "control right" which is only the first set of private property rights. (76) This definition was adopted by some researchers, although normally they would have added the income right. For instance, Chang and Wang expressly claimed that they followed Grossman and Hart's definition. However, they extended the definition of ownership by including both "residual control right" and "residual benefit right". (77)

Li et al. defined ownership as "residual claimancy". (78) They claimed that "traditionally, ownership is defined by residual rights" and that "economists recognise that both residual claims and control rights are indispensable to ownership". However, they omitted control rights "not because they are irrelevant but for technical tractability" and they conjectured that "their results apply to control rights as well". Similarly, Zhang defined ownership as "residual claimancy". (79) He again admitted that "economists have recognised that residual claim and control rights are two major components of ownership", but he still omitted the control right "by assuming that the control right is a derivative of the residual claim".

More researchers "merely" neglected alienation right. For instance, Che and Qian defined the ownership of a project as "(i) the right of undertaking the task of control over the project type, and (ii) the right of receiving an unobservable part of the revenue". (80) This definition combines the notion of use right and income right. David D. Li thought control right and decision right over the disposition of profit were the only two aspects of private property rights. (81) Perotti et al. agreed that private property rights were "a bundle of rights" but among which the most important were "the allocations of residual control rights and rights to residual benefits". (82) Li did not make an express definition. (83) However, he implied that private property rights are "rights of control" and "residual claim". Zhou and Wang agreed that "the modern theory of property rights views ownership as a system of control rights and cash flow rights". (84)

In contrast to the omission of alienation right, Furubotn and Pejovich opined that the right of ownership in an asset consisted of "the right to use it, to change its form and substance, and to transfer all rights in the asset through, e.g. sale, or some rights through, e.g. rental". This concept included both use right and alienation right, with income right missing. (85)

Ownership per se is not important to private property rights. The Hong Kong land tenure system is a good example. All lands in Hong Kong belonged to the Crown before 1997 and to the Hong Kong government after 1997. However, individual land "owners" still enjoy the use right, income right and alienation right, hence possessing the private property rights. If ownership per se is important, then this international famous example of a capitalistic economy will have become "socialistic". In our survey, there was one article that seemed to take thought ownership as a decisive factor for private property rights. (86) The authors thought there were four basic tenets of property rights: ownership, residual claimant, alienation right and residual right of control.

Examples of Correctly Defined Private Property Rights

Fortunately, there are a few studies which revealed a correct understanding of private property rights. For instance, Putterman indicated that the "core bundle of rights that comprise 'ownership' are the right to utilise the asset (utilisation right), the right to possess the fruits (and responsibility for the negative outcomes, such as damages and debts) and the right to transfer these rights to another agent through gift or sale (alienation right)". (87) Although Li et al. (88) cited the definition of ownership from Furubotn and Pejovich, (89) they nevertheless added income to the bundle, arguing that the three elements of ownership were "the right to sell an asset", "the right to the returns generated from an asset" and "the right to change the form or substance of an asset".

Other examples of correctly defining private property rights are reviewed below in the analysis of the nature of TVEs. (90) Researchers have had divergent views on the nature of TVEs. The key to understanding the differences pivots on whether or not researchers had a correct concept of private property rights.

The Nature of TVEs

The nature of TVEs is one of the most controversial topics in the literature of economic transition in China. Numerous studies have intended to identify their nature. Examples include Chang and Wang, (91) Che and Qian, (92) Gordon and Li, (93) Hsiao et al., (94) Jin and Qian, (95) Li, (96) Montinola et al., (97) Naughton, (98) Nee, (99) Oi, (100) Perotti et al., (101) Sun, (102) Walder, (103) Weitzman and Xu, (104) Zhang, (105) and Zhu. (106) The following two sections concentrate on the relationship between the researchers' concept of private property rights and their ideas concerning the nature of TVEs. Table 2 provides a survey of 18 studies that sought to discover the nature of TVEs. It is interesting to compare the authors' definition of private property rights and their opinions on the nature of TVEs. Generally, authors who have a correct definition would agree that township and village governments (TVGs) are the owners of the TVEs. However, authors who either have a wrong concept or did not specify their understanding of private property rights have diverging views on the nature of TVEs.

The Nature of TVEs with a Wrong or No Definition of Private Property Rights

There are six studies on the nature of TVEs that provided wrong definitions of private property rights. (107) There were a range of opinions among these. Some authors thought that TVEs were owned by local citizens but controlled by the local government. (108) Some thought that TVEs were owned by local governments. (109) Others insisted that TVEs had ambiguous or vaguely defined property rights. (110)

There are nine studies about the nature of TVEs but which did not provide a definition of property rights. Three authors thought that TVEs are owned by community members and controlled by the TVGs. (111) Another three thought TVGs owned the TVEs. (112) One work simply summarised theories of TVEs. (113) Another thought that TVEs could be characterised as hybrid forms. (114) The remaining work was notable in that it emphasised that the property right structure of TVEs should not be regarded as static. (115) Rather, TVEs have evolved from de facto TVG ownership in the past to the present diversified forms. The most notable form is joint stock cooperatives.

The Nature of TVEs with Correct Definition of Private Property Rights

Researchers who have a correct understanding of private property rights believe that the ownership of TVEs was held by the TVGs. There are three such works in our survey. Naughton opined that township and village officials in their official capacity owned the TVEs because they possessed all the "key components of property rights: control of residual income, the right to dispose of assets and the right to appoint and dismiss managers and assume direct control". (116) Similarly, Walder opined that TVGs held the property rights of TVEs as they held "all rights to control, income flows, and sale or liquidation". (117) A further example is Smyth who also agreed that TVGs exercised property rights in the TVEs as they possessed "the privileges of ownership, i.e., the right to transfer, use, or appropriate the assets". (118)

The Nature of TVEs Interpreted

Those who regard community members as the "owners" of TVEs sometimes neglect the matter of voluntarism. Chang and Wang, with their wrong definition of private property rights as discussed above, sought to rationalise why the control right is given to the TVGs. (119) They argued that the control right was given to TVGs because "ordinary citizens could not provide security and access to resources". Although they correctly identified TVGs as the owner of the TVEs, they erred in that they assumed that the citizens voluntarily submitted their property rights to the government. Zhang made similar mistakes in determining who the principals were in the public economy. (120) As shown in the previous section and Table 1, Zhang thought that the "community members" or "ordinary citizens" were the principals who delegated their power to the "central committee" or the "central planner". The mistakes were obvious. The "community members" or "ordinary citizens" did not do so voluntarily, as they did not have the option to escape such an arrangement.

Two points can be deduced from the above analysis. The first is that we do not know the nature of a TVE unless we know who has the control right, residual claim right and alienation right to it. The second is that the ownership structure of TVEs is not static but evolving. From the late 1970s to mid-1990s, most TVEs were owned by TVGs, though some were "fake collectives", i.e., only using a collective label for protection and economic benefit. (121) These were correctly observed by those authors having a correct understanding of private property rights. As institutional arrangements changed, the political climate was no longer unfavourable to private ownership, and when the government no longer had comparative advantage over individuals on the procurement of resources, more TVEs had evolved into private ownership.

Conclusion

China's economic reforms have been unique in human history. The planned economy was successfully transformed into a market one in less than 30 years, accompanied by a marvellous increase in economic performance. China's experience is especially valuable in the understanding of institutional economics. However, misuse or misconception of theories can hinder one's understanding of enterprise governance and reform in China. On the one hand, inappropriate theories have been used to approach some issues. On the other, numerous new theories or terms have been developed to explain those concepts perfectly understandable if one has a correct concept of private property rights.

This article has proposed that the PA theory is not suitable for analysing SOEs as by definition the principals must be able to make decisions and own property rights. It further demonstrated that application of the Theory has been problematic due to the enigmatic identification of the principals and the inability to deduce refutable hypotheses. One primary reason for the divergent views on the identity of the principal was the widespread misconceptions about private property rights. These misconceptions further led to divergent views on the nature of another important actor in China's economy, the TVEs. Since SOEs and TVEs were the only two significant forms of enterprises in the early stages of China's reform, the coverage of this paper is comprehensive. It is hoped that clarification of these three concepts will facilitate further and better understanding of China's transitional economy.

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(36) Shirley and Xu, "Information, Incentives, and Commitment", p. 360.

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(43) Cauley and Sandler, "Agency Theory and the Chinese Enterprise under Reform", "Agency Cost and the Crisis of China's SOEs"; Li and Wu, "The Ownership School vs. the Management School".

(44) Bai et al., "A Multi-Task Theory of the State Enterprise Reform"; Cauley and Sandler, "Agency Theory and the Chinese Enterprise under Reform"; "Agency Cost and the Crisis of China's SOEs"; Chang, "Growth, Corruption and State Capacity? China in Comparative Perspective"; Huang Yasheng, "Managing Chinese Bureaucrats: An Institutional Economics Perspective", Political Studies 50 (2002): 61-79; Lin et al., "Competition, Policy Burdens and State-owned Enterprise Reform"; Lin and Zhu, "Ownership Reform and Corporate Governance"; Tylecote and Cai, "China's SOE Reform and Technological Change"; Zhang, "Decision Rights, Residual Claim and Performance"; "A Principal-agent Theory of the Public Economy and Its Applications to China"; and Zhou and Wang, "Agency Cost and the Crisis of China's SOEs".

(45) Cauley and Sandler, "Agency Theory and the Chinese Enterprise under Reform", p. 42.

(46) Zhang, "Decision Rights, Residual Claim and Performance", p. 231.

(47) Li and Wu, "The Ownership School vs. the Management School"; Mengistae and Xu, "Agency Theory and Executive Compensation"; Shirley and Xu, "Empirical Effects of Performance Contracts" and Xu, "Determinants of the Repartitioning of Property Rights".

(48) Li and Wu, "The Ownership School vs. the Management School".

(49) Shirley and Xu, "Empirical Effects of Performance Contracts".

(50) Mengistae and Xu, "Agency Theory and Executive Compensation"; Xu, "Determinants of the Repartitioning of Property Rights".

(51) Li and Wu, "The Ownership School vs. the Management School".

(52) Shirley and Xu, "Empirical Effects of Performance Contracts".

(53) Mengistae and Xu, "Agency Theory and Executive Compensation".

(54) Xu, "Determinants of the Repartitioning of Property Rights".

(55) Cheung, "A Theory of Price Control", p. 57.

(56) Armen A. Alchian and Harold Demsetz, "Production, Information Costs, and Economic Organization", American Economic Review 62 (1972): 777-95.

(57) Cheung, "A Theory of Price Control".

(58) Ronald Coase, "The Federal Communications Commission", Journal of Law and Economics 2 (1959): 27.

(59) Zhou Qiren, Income Is a Series of Events (Hong Kong: Arcadia Press, 2003) [in Chinese], p. 233.

(60) Ronald Coase, "The Nature of the Firm", Economica 4 (1937): 386-405; Coase, "The Federal Communications Commission"; Ronald Coase, "The Problem of Social Cost", Journal of Law and Economics 4 (1960): 1-44.

(61) S. Grossman and O. Hart, "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", Journal of Political Economy 94 (1986): 691-719.

(62) Li Shaomin, Li Shuhe and Zhang Weiying, "The Road to Capitalism: Competition and Institutional Change in China", Journal of Comparative Economics 28 (2000): 269-92.

(63) Zhang, "Decision Rights, Residual Claim and Performance".

(64) Che and Qian, "Insecure Property Rights and Government Ownership of Firms".

(65) Li, "A Theory of Ambiguous Property Rights in Transition Economies".

(66) Enrico C. Perotti, Sun Laixiang and Zou Liang, "State-owned versus Township and Village Enterprises in China", Comparative Economic Studies 41 (1999): 151-79.

(67) Li, "The Impact of Economic Reform".

(68) Zhou and Wang, "Agency Cost and the Crisis of China's SOEs".

(69) Eirik G. Furubotn and Svetozar Pejovich, "Property Rights and Economic Theory: A Survey of Recent Literature", Journal of Economic Literature 10 (1972): 1137-62.

(70) Weitzman and Xu, "Chinese Township and Village Enterprises".

(71) Li Shaomin, IlanVertinsky and Zhou Dongsheng, "The Emergence of Private Ownership in China", Journal of Business Research 57 (2004): 1145-52.

(72) Naughton, "Chinese Institutional Innovation and Privatization".

(73) Louis Putterman, "The Role of Ownership and Property Rights in China's Economic Transition", The China Quarterly 144 (1995): 1047-64.

(74) Russell Smyth, "Recent Developments in Rural Enterprise Reform in China", Asian Survey 38 (1998): 784-800.

(75) Walder, "Local Governments as Industrial Firms".

(76) Grossman and Hart, "The Costs and Benefits of Ownership", pp. 693-4.

(77) Chang Chun and Wang Yijiang, "The Nature of the Township-Village Enterprise", Journal of Comparative Economics 19 (1994): 435.

(78) Li et al., "The Road to Capitalism", p. 271.

(79) Zhang, "Decision Rights, Residual Claim and Performance", p. 233.

(80) Che and Qian, "Insecure Property Rights and Government Ownership of Firms", p. 473.

(81) Li, "A Theory of Ambiguous Property Rights in Transition Economies" (1996), pp. 2, 6.

(82) Perotti et al., "State-owned versus Township and Village Enterprises in China", p. 163.

(83) Li, "The Impact of Economic Reform on the Performance of Chinese State Enterprises, 1980-1989".

(84) Zhou and Wang, "Agency Cost and the Crisis of China's SOEs", p. 312.

(85) Furubotn and Pejovich, "Property Rights and Economic Theory", p. 1,140.

(86) Weitzman and Xu, "Chinese Township and Village Enterprises".

(87) Putterman, "The Role of Ownership and Property Rights", p. 1,049.

(88) Li et al., "The Emergence of Private Ownership in China".

(89) Furubotn and Pejovich, "Property Rights and Economic Theory", p. 1,146.

(90) Naughton, "Chinese Institutional Innovation and Privatization from Below"; Walder, "Local Governments as Industrial Firms"; and Smyth, "Recent Developments in Rural Enterprise Reform in China".

(91) Chang and Wang, "The Nature of the Township-Village Enterprise".

(92) Che and Qian, "Insecure Property Rights and Government Ownership of Firms"; Che Jiahua and Qian Yingyi, "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises", The Journal of Law, Economics and Organization 14 (1998b): 1-23.

(93) Roger H. Gordon and Li Wei, "Chinese Enterprise Behavior under the Reforms", American Economic Review 81 (1991): 202-6.

(94) Hsiao et al., "Shares versus Residual Claimant Contracts: The Case of Chinese TVEs".

(95) Jin Heui and Qian Yingyi, "Public versus Private Ownership of Firms", Quarterly Journal of Economics 113 (1998): 773-808.

(96) Li, "A Theory of Ambiguous Property Rights in Transition Economies".

(97) Montinola et al., "Federalism, Chinese Style".

(98) Naughton, "Chinese Institutional Innovation and Privatization".

(99) Nee, "Organizational Dynamics of Market Transition".

(100) Oi, "The Role of the Local State".

(101) Perotti et al., "State-owned versus Township and Village Enterprises".

(102) Sun Laixiang, "Anticipatory Ownership Reform Driven by Competition: China's Township-village and Private Enterprises", Comparative Economic Studies 42 (2000): 49-75.

(103) Walder, "Local Governments as Industrial Firms".

(104) Weitzman and Xu, "Chinese Township and Village Enterprises".

(105) Zhang, "Decision Rights, Residual Claim and Performance".

(106) Zhu Tian, "A Theory of Contract and Ownership Choice in Public Enterprises under Reformed Socialism: the Case of China's TVEs", China Economic Review 9 (1998): 59-71.

(107) Chang and Wang, "The Nature of the Township-Village Enterprise"; Che and Qian, "Insecure Property Rights and Government Ownership of Firms"; Li, "A Theory of Ambiguous Property Rights in Transition Economies"; Perotti et al., "State-owned versus Township and Village Enterprises in China"; Weitzman and Xu, "Chinese Township and Village Enterprises"; and Zhang, "Decision Rights, Residual Claim and Performance".

(108) Chang and Wang, "The Nature of the Township-Village Enterprise"; and Perotti et al., "State-owned versus Township and Village Enterprises in China".

(109) Che and Qian, "Insecure Property Rights and Government Ownership of Firms".

(110) Li, "A Theory of Ambiguous Property Rights in Transition Economies"; Weitzman and Xu, "Chinese Township and Village Enterprises as Vaguely Defined Cooperatives"; and Zhang, "Decision Rights, Residual Claim and Performance".

(111) Che and Qian, "Institutional Environment, Community Government, and Corporate Governance"; Montinola et al., "Federalism, Chinese Style"; and Zhu, "A Theory of Contract and Ownership Choice in Public Enterprises under Reformed Socialism".

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(115) Sun, "Anticipatory Ownership Reform Driven by Competition".

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(117) Walder, "Local Governments as Industrial Firms", p. 270.

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ABOUT THE AUTHOR

Ping Yung (ping.yung@ntu.ac.uk) is Senior Lecturer in quantity surveying at Nottingham Trent University. He has a PhD from the University of Hong Kong. His main research interests include theories in institutional arrangements and their applications in town planning and construction economics and management.
Table 1. Who Are the Principals and Who Are the Agents?

Ref. Author (Year) Enterprise Type

1. Cauley and Sandler SOE
 (1992)

2. Cauley and Sandler SOE
 (2001)

3. Chen and Rozelle TVE
 (1999)

4. Hsiao et al. TVE
 (1998)

5. Hua et al. SOE
 (2006, p. 407)

6. Li and Wu SOE
 (2002)

7. Lin et al. (1998) SOE

8. Lin and Zhu SOE
 (2000)

9. Mengistae and Xu SOE
 (2004)

10. Shirley and Xu SOE
 (1998)

11. Shirley and Xu SOE
 (2000)

12. Tylecote and Cai SOE
 (2004)

13. Xu SOE
 (1998)

14. Zhang SOE & TVE
 (1997)

15. Zhang SOE
 (1998)

16. Zhou SOE
 (2002, p. 139)

17. Zhou and Wang SOE
 (2000)

Ref. Principal and Agent Relationship

1. Principal: SOE manager;
 Agents: workers
 In addition, a SOE represents a multilevel organisation
 for which PA interactio: exist between each
 pair of hierarchical levels.

2. Principal: manager;
 Agents: workers
 There are other pairs but this one should be the
 focal PA relationship.

3. Principal. Officials in the community;
 Agent: Not specified

4. Principal: local government;
 Agent: the TVE, especially its manager

5. The principal is invisible

6. Principal: government agencies;
 Agent: SOE employees

7. Not specified clearly but could be implied from the text:
 Principal: the state;
 Agent: manager

8. Two-tiered PA relationship:
 Principal: government (or the people);
 First tier agent andprincipal to the second tier
 agent: government bureaucrats;
 Second tier agent: enterprises managers

9. Not specified clearly but could be implied from the text:
 Principal: local government that typically owns the SOEs;
 Agent: CEO of SOE

10. SOEs have no clear residual claimant; they are
 subject to many principals.

11. Principal: government officials;
 Agent: SOE manager.

12. Two-tiered PA Relationship:
 Principal. the state or people;
 First order agent: the government;
 Second-order agent: top-management

13. Principal. government;
 Agent: managers

14. Dual Hierarchical PA Chain:
 Upward PA Relationship:
 Principals (owner): residual claimants (co-owners)
 of the public economy (community members);
 Agent: Central committee representing the whole community;
 Downward PA Relationship:
 Principal: Central committee;
 Agent: Insider member of the firm

15. Before Reform:
 1. Original Principal: ordinary citizens;
 2. Acting Principal: central planners;
 3. Agent to 2 and Principal to 4: industrial bureau;
 4. Agent to 3: insider member of the firm.
 After Reform:
 Two Legitimisedprincipals: The government and the insider
 member of the firm;
 Double-faced agent: industrial bureau.

16. There is no principal.

17. Principal: the state, or more accurately, every
 Chinese citizen.
 Agents: in the order of central government,
 provincial government, local officials,
 managers and workers.

Table 2. Concept of Private Proberty Rights and the Nature of TVEs

 Ownership Definition

Ref. Author (Year) Use Income
 right right

1. Chang and Wang Yes Yes
 (1994)

2. Che and Qian Yes Yes
 (1998a)

3. Che and Qian N/A N/A
 (1998b)

4. Gordon and Li N/A N/A
 (1991)

5. Hsiao et al. N/A N/A
 (1998)

6. Jin and Qian N/A N/A
 (1998)

7. Li (1996) Yes Yes

8. Montinola et al. N/A N/A
 (1996)

9. Naughton (1994) Yes Yes

10. Oi (1995) N/A N/A

11. Perotti et al. Yes Yes
 (1999)

12. Smyth (1998) Yes Yes

13. Sun (2000) N/A N/A

14. Victor (1992) N/A N/A

15. Walder (1995) Yes Yes

16. Weitzman and Yes Yes
 Xu (1994)

17. Zhang (1997) No * Yes

18. Zhu (1998) N/A N/A

 Ownership Definition

Ref. Alienation Nominal
 right right

1. Chang and Wang No No
 (1994)

2. Che and Qian No No
 (1998a)

3. Che and Qian N/A N/A
 (1998b)

4. Gordon and Li N/A N/A
 (1991)

5. Hsiao et al. N/A N/A
 (1998)

6. Jin and Qian N/A N/A
 (1998)

7. Li (1996) No No

8. Montinola et al. N/A N/A
 (1996)

9. Naughton (1994) Yes No

10. Oi (1995) N/A N/A

11. Perotti et al. No * No
 (1999)

12. Smyth (1998) Yes No

13. Sun (2000) N/A N/A

14. Victor (1992) N/A N/A

15. Walder (1995) Yes No

16. Weitzman and Yes Yes
 Xu (1994)

17. Zhang (1997) No No

18. Zhu (1998) N/A N/A

Ref. Nature of TVE

1. A TVE is owned by local citizens and controlled by
 the TVG. Control right was assigned to the TVG because
 ordinary citizens cannot provide security
 and access to resources.

2. Proposed a model of ownership under insecure
 property rights. TVEs are owned by local
 governments because they can limit state predation.

3. TVEs are characterised as community enterprises which
 are the bottom tier of a three-tier structure in
 which the middle tier is the community government and
 the top tier consists of the residents. The community
 residents are the beneficiaries of TVEs.

4. Local governments effectively own and control TVEs

5. Local government in practice owned TVEs

6. Summarised five theories of TVEs but did not
 provide their own theory.

7. TVEs have ambiguous property rights. They are
 jointly controlled by entrepreneurs and the
 local governments.

8. TVEs are owned by township and village
 communities and controlled by TVG.

9. Township and village officials in their official
 capacity owned the TVEs.

10. TVEs are owned by TVG (local state corporatism). Some
 TVEs are "fake collectives"--only using collective
 label for protection and economic benefit.

11. Community members, as owners, possess the right
 to derive both short-run and long-run residual benefits
 from the TVE's operation; residual control rights rest
 with the TVG. The community acts as a collective equity
 holder and the TVG as the executive equity holder.

12. TVG has de facto ownership rights to TVEs.

13. The property right structure of TVEs should not
 be regarded as static. TVEs have evolved from de
 facto TVG ownership to the present diversified
 forms. Competition has induced such
 ownership reforms.

14. TVEs are characterised as hybrid forms. They are
 neither public (state-owned) nor private, in theory as
 their properties belong to all who live within the
 jurisdiction of the local governments.

15. TVEs are not a hybrid of state and private ownership;
 they are under a form of public ownership no different
 from the large urban state sector.

16. TVE is a vaguely defined producer cooperative. The
 community government is the de facto executive owner
 of the TVEs. There are no residual claimants. Neither
 the government nor the residents have the alienation
 right. The government has no residual control
 right as well.

17. TVEs are "public owned" and their property rights
 are also "vaguely-defined".

18. A TVE is in principle owned by all the residents
 in a township or village but is controlled by the TVG,
 or more precisely, the TVG officials.

Note: * The author omitted control right because it is
a derivative of the residual claim.
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Date:Mar 1, 2009
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