A microeconomic study of China's rural industrialization, 1978-1994 : cultural constraints, institutional changes, and economic efficiency
A MICRO ECONOMIC STUDY OF CHINA'S RURAL INDUSTRIALIZATION, 1978 -1994: CULTURAL CONSTRAINTS, INSTITUTIONAL CHANGES, AND ECONOMIC EFFICIENCY
CHEUNG Hoi Cheung (1li15:~.f) MA. Univ. of York, U. K.
for the Degree of Doctor of Philosophy at the University of Hong Kong
in June 2000
If a clear delineation of private property right structure and a well-developed rule-of-Iaw governance in society to protect the contractual parties in economic transactions are the. two premises to achieve efficient allocation of resources, the industrial development in the Chinese countryside should not have accomplished a prominent economic progress because there lacks the two premises in the Country. There are three major constraints in the mixed economy of China, namely (1) an absence of well-developed rule-of-Iaw governance in the society in which there are uncertainties in the contractual enforcement of economic transactions; (2) the existence of imperfect market conditions in the mixed economy; and (3) a cultural specificity - a "scope of relationship-specificity" or "relationship-specific scope" originated from the conception of "scope of consanguinity relationship" is believed
to have the function of constraining the behavior of economic agents like the firms.
Under the influence of cultural specificity, the Chinese entrepreneurs and / or the owners of the firms utilize a "relationship-specific scope" as the behavioral governance mechanism plus the existing "rule-of-Iaw governance mechanism" in the society to conduct economic transactions within the firms and in the market. They do so because they do not believe the existing rule-of-Iaw governance in the society is effective and efficient in monitoring and enforcing contractual relationships and minimizing "risks and uncertainties" of economic transactions. They believe that credibility of individuals within the "scope" is stronger than that of those beyond it.
Based on the empirical findings gathered from the Chinese context, a new theory of the firm is deduced - the Relationship-specific Theory of the Firm. This theory asserts that the behavior of economic agents is constrained m a "relationship-specific scope" plus the existing "rule-of-Iaw governance mechanism of society." The degree of utilizing the scope of relationship-specificity varies inversely with the degree of rule-of-Iaw governance in society. A convex "governance curve" is therefore derived under a relationship of diminishing marginal rate of substitution between the degree of utilizing the "relationship-specific scope" and the degree of "rule-of-Iaw governance" in society. That is, when the rule-of-Iaw governance in society has been developed up to a certain extent, increasing one more unit of rule-of-Iaw governance may induce less than one unit of decrease in utilizing the "relationship-specific scope."
Even a rule-of-Iaw governance mechanism has been highly developed, there still has some "minute moral hazard behavior" in economic transactions which cannot be effectively monitored and for which the related enforcement cost will be prohibitively high. This minute moral hazard behavior will be left to the governance of the "relationship-specific scope." Since there is no 100% rule-of-Iaw governance in all forms of society, economic transactions will be conducted along the Curve and results in sub-optimal resource allocation. The
objective of the firms which are established on family- and / or clannish basis is the utility / welfare maximization of the family and / or the clan of the entrepreneur and / or the owner of the firm.
School:The University of Hong Kong
School Location:China - Hong Kong SAR
Source Type:Master's Thesis
Keywords:institutional economics china hong kong industrial organization national characteristics chinese rural industries
Date of Publication:01/01/2000