ABSTRACT
This chapter analyzes the Chinese state-owned industrial sector as it functions under the two-tier system, with the aid of a simple static general equilibrium model. It examines the impact of planning and the efficiency of the market mechanism in a stylized economy that is a hybrid of plan and market. The chapter presents a simple static general equilibrium model of the Chinese economy, designed to illuminate patterns of resource allocation in the state-owned industrial sector. The model differs in several respects from the standard Arrow-Debreu framework, so certain additional assumptions are required to demonstrate existence of equilibrium. Unconstrained equilibrium has strong welfare/efficiency properties, which are demonstrated using the Pareto criterion. Constrained equilibrium is not Pareto optimal, though it is “constrained Pareto optimal,” given plan parameters, wage rates, and profit-sharing rates. If the equilibrium solution involves plan constraints on some agents, many properties of unconstrained equilibrium no longer hold.
