ABSTRACT
The model simulations result in four predictions that relate the contractual form of a Taking China’s township and village enterprises (TVEs) to several exogenous factors: the development of the market system, the technical structure of the firm, and the economic setting of the locality in which the firm operates. The entire mechanism through which the exogenous forces have been translated into the innovation of contractual institutions can be fully clarified. The economic setting may have had an influence on such cross-regional variations as predicted by the model. The technical structure of the firm shows a strong explanatory power in the determination of firm’s contractual form. More fixed capital per worker implies that the production of the firm is more specialized and relatively harder to adapt to the distortion in the external environment. The data used in the estimation is collected in the field investigation conducted in rural China in 1994.
