ABSTRACT

This chapter focuses on the two major aspects of the Chinese shareholding system: the structure of residual claims and the agency problem. The experiment with the shareholding system is economically important in that it is the first effort to solve the problem by changing the property relations of the enterprise in the direction of privatization. The relationship between the state and a particular state enterprise in socialism can have some analogy with that between an investor and one of the many firms across which he has diversified security ownership. The Chinese shareholding system will be characterized as a semi-nonprofit organization with constrained, alienable residual claims, and it will be argued that its problem is the possibility of expropriation of state-donated assets by agents seeking private benefit. When there exists the market for managerial and labor service, the managers or workers shirk at the cost of reducing the demand for their services and hence their wealth.