Chapter 1: The favorable policy treatments towards SOEs in the Chinese economy distort the upstream output prices. Because of the vertical market structure, it deteriorates the resource misallocation in the downstream manufacturing sectors. We explore the implication of upstream price distortion on downstream resource allocation efficiency in this paper. Based on the matched datasets of firm-level characteristics and prices, we first identify the price difference between SOEs and non-SOEs in China, especially in the upstream sector. We then show that this price distortion affects the resource allocation in the downstream sectors, and the gross output gain from upstream-produced input reallocation is 5.48%, comparable to that of labor or capital. Empirical exercises show the overall dist...[ Read more ]

Chapter 1: The favorable policy treatments towards SOEs in the Chinese economy distort the upstream output prices. Because of the vertical market structure, it deteriorates the resource misallocation in the downstream manufacturing sectors. We explore the implication of upstream price distortion on downstream resource allocation efficiency in this paper. Based on the matched datasets of firm-level characteristics and prices, we first identify the price difference between SOEs and non-SOEs in China, especially in the upstream sector. We then show that this price distortion affects the resource allocation in the downstream sectors, and the gross output gain from upstream-produced input reallocation is 5.48%, comparable to that of labor or capital. Empirical exercises show the overall distortion changes in both upstream and downstream markets over time, but the SOE reform only helps to improve the distortion in the downstream sectors. We also investigate the factors behind the policy distortion and find that good local governance helps alleviate the price distortions.

Chapter 2: This paper investigates the effect of government policies that reduce the credit constraint and entry barrier for firms in the Chinese economy quantitatively. To build a suitable framework for quantitative analysis, we incorporate features of the Chinese economy into a standard RBC model. These features include the difference in productivity and asymmetric access to financial markets between state-owned enterprises (SOE) and domestic private enterprises (DPE) and the vertical production structure discussed in Li et al. (2015). In particular, we introduce endogenous firm dynamics in both the upstream and downstream sectors. Quantitative analysis shows that this model can reasonably explain specific patterns of Chinese business cycles and thus can be used as a benchmark model for policy analysis. Policy experiments show that the output will increase the most once the entry barrier for private firms in the upstream sector is lowered. A weaker credit constraint will lead to higher output and a capital reallocation from SOEs to DPEs. The convergence of the productivity gap will make SOEs prefer to invest in the upstream sector while the DPEs prefer downstream. These results suggest upstream DPEs are the most constrained in China.