We develop a model in which asymmetric information gives rise to both problems of adverse selection and costly state verification. Under the separating equilibrium in the credit market, some borrowers are credit rationed. We consider three types of government subsidies: interest rate subsidy,...

This paper documents a hallmark feature of China’s state capitalism as the state controlling the economy in a vertical structure: State-owned enterprises (SOEs) monopolize key industries in the upstream, whereas the downstream industries are largely open to private competition. We develop...