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31 Colum. J. Asian L. 1 (2017-2018)
State Ownership and Regulatory Costs: A Law and Economic Explanation for the Prevalence of State-Owned Enterprises in China

handle is hein.journals/colas31 and id is 3 raw text is: STATE OWNERSHIP AND REGULATORY COSTS: A LAW AND ECONOMIC EXPLANATION FOR THE PREVALENCE OF STATE-OWNED ENTERPRISES IN CHINA James Si Zeng* Despite China's effort to privatize many state-owned enterprises (SOEs) after 1978, SOEs remain a prevalent type of enterprise in contemporary China. There is a widespread belief that they are inefficient and only exist because they have captured the government. This belief however does not fully explain why SOEs have been privatized in some sectors but not in others. This Article provides an efficiency explanation of SOEs in China. Applying the law and economic theory on the ownership of enterprise to state ownership, this Article conceptualizes the efficiency of SOEs as a tradeoff between two social costs: ownership costs and regulatory costs. SOEs generally have high ownership costs and thus are not common in many developed countries. However, in developing countries with weak regulatory capacity and legal institutions, they may help reduce regulatory costs, including the social costs associated with the enactment, alteration, and enforcement of regulatory rules, and those costs resulting from the failure to regulate enterprises adequately. The magnitude of regulatory costs in a specific country and industry, in turn, is significantly influenced by the regulatory institutions within which the enterprises operate. An important implication is that refining regulatory regimes may reduce regulatory costs and - in part by facilitating privatization of SOEs - enhance social efficiency. IN TR O D U CTIO N ................................................................................................................................. 2 I. A THEORETICAL FRAMEWORK: OWNERSHIP COSTS AND REGULATORY COSTS ........................... 9 A . O w nersh ip C osts ................................................................................................................... 9 B . R eg ulatory C osts ................................................................................................................. 10 C. Ownership and Regulatory Costs: A Framework for Analyzing State Ownership ...... 17 II. EXPLAINING THE PREVALENCE OF SOES IN REGULATED INDUSTRIES IN CHINA .................... 18 A. An Overview of SOEs in M ajor Sectors ......................................................................... 19 Assistant Professor, Chinese University of Hong Kong; J.S.D., Yale Law School, contact: jamessizeng@cuhk.edu.hk. I would like to express my sincere gratitude to Professor Henry Hansmann for his guidance, without whom this project would have been impossible. For insightful comments and suggestions, I am grateful to Professors Ian Ayres, Donald Clarke, Christine Jolls, Alvin Klevorick, Yair Listokin, Susan Rose- Ackerman, and Taisu Zhang. I would especially like to thank Professor Curtis Milhaupt for reading through an earlier draft and providing suggestions that significantly improved this Article. For helpful discussions, I thank Boli Chen, Jingwen Han, Xu Pang, Zhiang (Sean) Song, Yun Tang, Yuan Tian, Jingjian Wu, Youlin Yuan and participants in the 2016 Yale Law School Doctoral Conference, the 1 annual Conference on Empirical Legal Studies in Asia, and Hong Kong University China Law Research Seminar. Last but not least, I would like to thank Yale Law School Oscar M. Reubhausen Fund for generous research support.

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