Property Rights, Endowment Structure and Reforms of Large SOEs in China-a Nash Bargaining Approach

Unlike the narrow approach currently prevailing in the literature, this paper proposes a Nash bargaining model to explore an optimal strategy for state-owned enterprise (SOE) reforms in China. We argue that ceteris paribus the current illnesses of low efficiency and rent-seeking commonly suffered by China's state-owned sector can be cured by a two-pronged strategy in which the intertwining between property rights and endowment allocation, which depends on bargaining between the principal (state) and the agent (SOE managers). This study regards ‘social-extra policy burdens' as the main obstacle to efficiency improvement in the state sector. For this end, we identify two ‘Ownership Reform Indifference Points' in the commonly known choices of institutional changes in a reforming Soviet economy to make it more efficient with a joint-stock reform and then to become Pareto optimal under the full privatization