Agency cost and the crisis of China's SOE

Agency cost can be defined as the difference between the profit of a firm run by an owner-manager and the same firm run by an agent. State-owned enterprises (SOEs) control 2/3 of China's industrial capital and 70% of its industrial bank loans, but only provided half of its total industrial output. Obviously solving the SOEs' problem is the key to China's success. We argue that the root of China's SOEs'crisis is its high agency cost resulting from a obsolete state assets management system. By modeling the agency cost mechanism we explain the failure of SOES and make policy propositions in a transition period. (C) 2001 Elsevier Science Inc. All rights reserved.