nep-cna New Economics Papers
on China
Issue of 2017‒08‒27
nine papers chosen by
Zheng Fang
Ohio State University

  1. On the Relationship Between Quality and Productivity: Evidence from China's Accession to the WTO By Haichao Fan; Yao Amber Li; Stephen R. Yeaple
  2. Misallocation, Selection and Productivity: A Quantitative Analysis with Panel Data from China By Loren Brandt; Jessica Leight; Diego Restuccia; Tasso Adamopoulos
  3. Can Superstition Create a Self-Fulfilling Prophecy? School Outcomes of Dragon Children of China By Naci H. Mocan; Han Yu
  4. Local Protectionism, Market Structure, and Social Welfare: China's Automobile Market By Panle Jia Barwick; Shengmao Cao; Shanjun Li
  5. Lineage-based Heterogeneity and Cooperative Behavior in Rural China By He, Quqiong; Pan, Ying; Sarangi, Sudipta
  6. China, Europe and the Great Divergence: A Study in Historical National Accounting, 980-1850 By Broadberry, Stephen; Guan, Hanhui; Li, David Daokui
  7. The Rise of a Financial Revolution in Republican China in 1900-1937: an Institutional Narrative By Ma, Debin
  8. The Paradox of Power: Understanding Fiscal Capacity in Imperial China and Absolutist Regimes By Ma, Debin; Rubin, Jared
  9. How do Tax Incentives A ect Investment and Productivity? Firm-Level Evidence from China By Yongzheng Liu; Jie Mao

  1. By: Haichao Fan; Yao Amber Li; Stephen R. Yeaple
    Abstract: This paper presents an analysis of the effect of China's entry into the WTO on the quality choices of Chinese exporters in terms of their outputs and their inputs. Using highly disaggregated firm-level data, we show that the quality upgrading made possible by China's tariff reductions was concentrated in the least productive Chinese exporters. These firms, which had been laggards in terms of quality prior to the tariff reduction, were the most aggressive in increasing the quality of their exports and their inputs and in redirecting their exports toward high income markets where demand for high quality goods is strong. Our empirical results are consistent with a simple model featuring scale effect and non-Hicks' neutral productivity that disproportionately affects the efficiency with which firms use intermediate inputs. This latter feature does not appear in workhorse models of firm heterogeneity and endogenous quality choice which provide a distorted view of the impact of trade liberalization on quality upgrading.
    JEL: F1 F10 F14 O3
    Date: 2017–08
  2. By: Loren Brandt (University of Toronto); Jessica Leight (Williams College); Diego Restuccia (University of Toronto); Tasso Adamopoulos (York University)
    Abstract: We use household-level panel data from China and a quantitative framework to document the extent and consequences of factor misallocation in agriculture. We find that there are substantial frictions in both the land and capital markets linked to land institutions in rural China that disproportionately constrain the more productive farmers. These frictions reduce aggregate agricultural productivity in China by affecting two key margins: (1) the allocation of resources across farmers (misallocation) and (2) the allocation of workers across sectors, in particular the type of farmers who operate in agriculture (selection). We show that selection can substantially amplify the static misallocation effect of distortionary policies by affecting occupational choices that worsen the distribution of productive units in agriculture.
    Date: 2017
  3. By: Naci H. Mocan; Han Yu
    Abstract: In Chinese culture those who are born in the year of the Dragon under the zodiac calendar are believed to be destined for good fortune and greatness, and parents prefer their kids to be born in a Dragon year. Using province level panel data we show that the number of marriages goes up during the two years preceding a Dragon year and that births jump up in a Dragon year. Using three recently collected micro data sets from China we show that those born in a Dragon year are more likely to have a college education, and that they obtain higher scores at the university entrance exam. Similarly, Chinese middle school students have higher test scores if they are born in a Dragon year. We show that these results are not because of family background, student cognitive ability, self-esteem or students’ expectations about their future. We find, however, that the “Dragon” effect on test scores is eliminated when we account for parents’ expectations about their children’s educational and professional success. We find that parents of Dragon children have higher expectations for their children in comparison to other parents, and that they invest more heavily in their children in terms of time and money. Even though neither the Dragon children nor their families are inherently different from other children and families, the belief in the prophecy of success and the ensuing investment become self-fulfilling.
    JEL: D91 I21 Z1
    Date: 2017–08
  4. By: Panle Jia Barwick; Shengmao Cao; Shanjun Li
    Abstract: While China has made great strides in transforming its centrally-planned economy to a market-oriented economy, there still exist widespread interregional trade barriers, such as policies and practices that protect local firms against competition from non-local firms. This study documents the presence of local protectionism and quantifies its impacts on market competition and social welfare in the context of China’s automobile market. This market exhibits a salient feature that vehicle models by joint ventures (JVs) and especially state-owned enterprises (SOEs) command much higher market shares in their headquarter province than at the national level. Through spatial discontinuity analysis at provincial borders, falsification tests, and consumer surveys, we first confirm protective policies such as subsidies to local brands as the primary contributing factor. We then set up and estimate a market equilibrium model to quantify the impact of local protection, controlling for other demand and supply factors. Counterfactual simulations show that local protection leads to significant choice distortions, resulting in 18.7 billion yuan of consumer welfare loss, amounting to 40% of total subsidy. Provincial governments face a prisoner’s dilemma: according to our estimates, local protection reduces aggregate social welfare, but the provincial governments have no incentive to unilaterally remove local protection.
    JEL: D04 D6 F15 H2 L1 L5 L62
    Date: 2017–08
  5. By: He, Quqiong; Pan, Ying; Sarangi, Sudipta
    Abstract: This paper investigates how lineages, the commonly found organizations in rural villages of China, affect people’s intra- and cross-lineage cooperative behavior. We use data from the Chinese Household Income Project Survey 2002, which exclusively contains information about the lineage structure in these villages allowing us to classify three levels of lineage-based heterogeneity. Our identification strategy relies on the exogeneity of lineage-based heterogeneity. We find evidence that people in a village with higher lineage-based heterogeneity are less likely to exhibit reciprocity behavior within lineages or contribute to the provision of public goods that are jointly shared across lineages. The estimation results remain robust to the inclusion of various control variables and additional background characteristics. Finally, we examine a number of other economic outcomes and find that more homogeneous villages do better than other types of villages.
    Keywords: Cooperation; Lineage Networks; Reciprocity; Local Public Goods; China
    JEL: D71 H41 O12 O17
    Date: 2017–08
  6. By: Broadberry, Stephen (Nuffield College, Oxford); Guan, Hanhui (Peking University); Li, David Daokui (Tsinghua University)
    Abstract: Chinese GDP per capita fluctuated at a high level during the Northern Song and Ming dynasties before trending downwards during the Qing dynasty. China led the world in living standards during the Northern Song dynasty, but had fallen behind Italy by 1300. At this stage, it is possible that parts of China were still on a par with the richest parts of Europe, but by 1750 the gap was too large to be bridged by regional variation within China and the Great Divergence had already begun before the Industrial Revolution.
    Keywords: GDP Per Capita; Economic Growth; Great Divergence; China; Europe JEL Classification: E100, N350, O100
    Date: 2017
  7. By: Ma, Debin (London School of Economics)
    Abstract: This paper surveys the phenomenal transformation of banking and finance, public debt and monetary regimes during 1900-1937, a period of great political instability in Chinese history. To understand why sectors which are often most vulnerable to the security of property rights and contract enforcement, have become the vanguard of growth in such an era of uncertainty, I highlight the role of institutions as seen in the form of a business dominated quasi-political structure that grew outside the formal political sphere. This structure rested on the institutional nexus of Western treaty ports (with Shanghai being the most important) and China Maritime Customs service, a relatively autonomous tax bureaucracy. By ensuring the credibility of repayment of government bonds, this financial-fiscal mechanism laid the institutional foundation for the rise of modern Chinese banks, a viable market for public debt and increasing supply of reputable convertible bank notes. My survey sheds new light on some of the most important and controversial issues related to Chinese and global economic history.
    Keywords: China; financial revolution; public debt; credible commitment JEL Classification: N15; N25;N45;E42
    Date: 2017
  8. By: Ma, Debin (London School of Economics); Rubin, Jared (Chapman University)
    Abstract: Tax extraction in Qing China was low relative to Western Europe. It is not obvious why: China was much more absolutist and had stronger rights over property and people. Why did the Chinese not convert their absolute power into revenue? We propose a model, supported by historical evidence, which suggests that if) the center could not ask its tax collecting agents to levy high taxes because it would incentivize agents to overtax the peasantry; ii) the center could not pay agents high wages in return for high taxes because the center had no mechanism to commit to refrain from confiscating the agent’s resources in times of crisis. A solution to this problem was to offer agents a low wage and ask for low taxes while allowing agents to take extra, unmonitored taxes from the peasantry. This solution only worked because of China’s weak administrative capacity due its size and poor monitoring technology. This analysis suggests that low investment in administrative capacity can be an optimal solution for an absolutist ruler since it substitutes for a credible commitment to refrain from confiscation. Our study carries implications for state capacity beyond Imperial China.
    Keywords: administrative capacity, fiscal capacity, state capacity, principal-agent problem, monitoring, credible commitment, absolutism, limited government, taxation, China, Europe, Qing Empire JEL Classification: N45, N43, H20, P48, P51
    Date: 2017
  9. By: Yongzheng Liu (School of Finance, Renmin University of China); Jie Mao (Department of Public Finance and Taxation, School of International Trade and Economics, University of International Business and Economics)
    Abstract: China initiated a critical value-added tax reform in 2004. Completed in 2009, it introduced permanent tax credit for firms' investment in fixed assets. We use a quasi-experimental design and a unique firm-level dataset covering all sizes of firms across a broad range of sectors and regions between 2005 and 2012, to test whether the reform promoted firms' investment and productivity. We estimate that on average, the reform raised investment and productivity of the treated firms relative to the control firms by 8.8 percent and 3.7 percent, respectively. We also show that the positive effects tend to be strengthened for firms with financial constraints.
    Date: 2017–08

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