Summary： This is a review article. Friedrich Hayek, Milton Friedman and James Buchanan represent a group of neoliberal economists with a liberalism pedigree. We refer to their thoughts as neoliberalism economics. Given the widespread and far-reaching impact of neoliberalism economics on academia and policymaking, we cannot ignore its major flaws and problems while recognizing its contributions.
First, on the nature of the free market, the Chicago and the Austrian Schools hold distinctly different arguments and understandings. The Chicago School's argument is based on the concept of equilibrium and follows the general equilibrium model, but adds harsh assumptions. It emphasizes the optimal nature of market equilibrium and consciously ignores mainstream economists' critique of the general equilibrium model and the research achievements of behavioral economics. The Austrian School's argument is based on the understanding of uncertainty according to the market process theory, and is strongly critical of the general equilibrium model, which it believes completely misunderstands of the true nature and function of the market and prices. According to the Austrian School, there is no optimal state in a market full of uncertainty; it is merely a trial-and-error learning process and has adaptive efficiency.
Second, neoliberalism economists pursue a “limited government” under the rule of law, arguing that the government's core economic power should be subject to particularly strict regulations, as strict as the rules for protecting the fundamental freedoms of the individual. The core aim of the “limited government” concept is to protect the individual's full private property rights and to counter the “tyranny of the majority”. However, when neoliberalism economists use limited democracy to design such a “limited government” reform plan, they are full of utopian thoughts. This is most prominent in Buchanan's argument, which is based on the consensus concept; he must recognize that the “majority voting” method for analyzing specific problems is a suboptimal choice. How does this prevent the “tyranny of the majority” that neoliberalism economists oppose? In Hayek's plan, restrictions on the candidacy of members of parliament are permitted, which is contrary to the spirit of modern political civilization in the western society.
Third, Buchanan regards “moral order” as the social ethical foundation of a market that can maximize individual freedom. However, this “moral order” is based on the ethics of individual exchange, which requires traders to recognize and respect each other's property rights. In this situation, lacking the concept of moral rights based on the sense of community and universal justice is not enough to constitute the moral foundation of the entire market society. In fact, asymmetric information, opportunistic behavioral tendencies and trading relationships extended to non-economic areas inevitably undermine the traditional ties that Hayek and Buchanan cherish to restrict individual behavior.
Fourth, in the view of neoliberalism economists, the most important function of the free market is the protection and expansion of individual freedom. Economic efficiency is only a by-product of that freedom. Therefore, they can ignore the huge inequality in the distribution of income and wealth and the wide range of social problems that result from the free market. They are even convinced that the market is also a good way to solve social problems. Such views not only erode the notion of the public sphere, but also shake the foundations of public life.
It is not special that a theory has its own dilemma. Truth is relative. Any theoretical structure has problems that must be further resolved. However, one thing is certain: the policy recommendations from those advocates of the “free market” have received much more attention than what they deserve. Therefore, the concerns are the one-sidedness and especially the serious consequences of putting policies with serious theoretical flaws into practice. It is conceited to say that market self-regulation is better than government regulation. A technical academic analysis becoming an ideological assertion may have serious consequences.
Keywords： Free Market; Limited Government; Consensus; Moral Order
JEL Classification： B10, B13

Summary： Since 2012, China has a downturn in the speed of economic growth but a rise in asset prices. This new phenomenon is referred to as the recessive bubble, and it challenges conventional understanding of asset bubbles and policy intervention. On the one hand, theories predict that a rapid rise in asset prices in general occurs only in times of economic prosperity. These theories state that optimistic expectation and credit expansion are the two key elements giving rise to asset bubbles. During an economic downturn, optimistic expectation is mitigated and the total amount of credit shrinks. Therefore, asset prices fall in response. On the other hand, in response to a recessive bubble, a conventional policy combination—contractionary monetary policy and strict macro-prudential policy (CS)—can even press down the economy and make the output gap even more negative. If expansionary monetary policy is adopted, it may conflict with strict macro-prudential policy, so that asset bubbles in the financial market go out of control. To sum up, recessive bubbles challenge macro policy intervention.
Therefore, this paper develops a dynamic stochastic general equilibrium model with asset bubbles and debt leveraging and comprehensively examines the mechanisms and policy design behind recessive bubbles. More specifically, this paper extends the classic macroeconomic model of asset bubbles of Martin & Ventura (2012) in three ways. First, following Minsky's (1986) categorization of firm financing modes, two different types of corporate-sector financing modes are described in this model: hedge and speculative financing. Second, based on the reality of the Chinese economy, the model incorporates two types of enterprise: production-oriented enterprises with high production efficiency, and zombie enterprises with low productivity that can sustain production only through debt rollover behavior. Third, the model characterizes household investors and financial leverage to simulate how individuals and financial organizations leverage up to gain high profits in reality.
We present three main findings. First, in contrast to the mechanism behind which conventional asset bubbles emerge—optimistic expectation and credit expansion—the key ingredient in recessive bubbles is the debt rollover behavior of zombie firms and other high leveraged firms. This causes an intricate phenomenon in which economic slowdown and financial bubblization jointly occurs. Second, in response to a recessive bubble, CS is no longer effective and leads to a sizable loss of aggregate output. However, a new policy combination—expansionary monetary policy coordinated with strict macro-prudential policy (ES)—works better than CS at stabilizing the output gap and controlling asset bubbles. Third, although the conventional view emphasizes the importance of inhibiting asset bubbles in the financial market, we find that deleveraging in a real economy is even more critical in response to the recessive bubbles. This result implies that depressing the leverage of zombie firms enhances policy effectiveness so that the debt rollover behavior of high leveraged firms can be reduced.
This paper makes two contributions. First, this is the first comprehensive study of the recessive bubble and associated policy design. Based on the debt rollover behavior view, we demonstrate the mechanism behind which a recessive bubble emerges, which sharply contradicts the current perspective based on optimism and liquidity. Second, we argue that the conventional CS policy is ineffective and that financial deleveraging becomes less critical for recessive bubbles. To crack down on recessive bubbles, policy authorities should implement ES and coordinate its efforts with zombie firm's deleveraging. Although expansionary monetary policy seemingly contradicts macro-prudential policy, the two do not conflict with each other in a recessive bubble. Hence, this paper not only extends theoretical consensus on the formation mechanisms and policy design of asset bubbles but also provides some insights into an important macroeconomic issue: how to effectively deal with the recessive bubble phenomenon in China.
Keywords： Macro Economy; Asset Bubble; Debt Leveraging; Monetary Policy; Macro-prudential Policy
JEL Classification： C30, E44, E61

Summary： In the modern economic system, monetary policy is one of the main instruments used to regulate and control the macro-economy, and its related issues have always been popular topics for scholars. China's financial system reform has made remarkable achievements during the past decades. In the process of this reform, has the preference behavior of the People's Bank of China (PBC) also changed? If so, what are the influencing factors? Do they impact the implementation of monetary policy? Accurately answering these questions is greatly significant for understanding the evolutionary trends of China's monetary policy regulation and for guiding financial practice.
Therefore, in this paper, we attempt to explore the PBC's loss preference behavior and its influencing factors from a time-varying perspective. We first propose a new type of loss function used to characterize the asymmetric and “zone” preference of the central bank, and then construct a two-stage Bayesian joint estimation strategy to estimate the PBC's real-time and time-varying loss preference using real-time data. Based on the estimated time-varying asymmetric preference, we construct and estimate a Markov regime-switching model to investigate the influencing factors of the PBC's preference behavior.
Our results show that the PBC is more averse to economic contraction and deflation than to economic expansion and inflation, and that this asymmetric preference presents significant time-varying and trend characteristics. The new loss function proposed in this paper can be well used to describe the “zone” characteristic of the central bank's loss preference. Our empirical results based on this new loss function show that the PBC has a “zone” preference for the real-time output gap, but has no “zone” reaction to inflation. Further analysis shows that the PBC's time-varying and asymmetric preference behavior presents a significant regime-switching characteristic and is remarkably affected by economic fluctuations, monetary policy cycles, preference substitution effects and economic policy uncertainty.
This paper is greatly significant for understanding the PBC's preference behavior and for improving the effectiveness of China's monetary policy. The results show that the central bank presents a “zone” preference for the real-time output gap, motivating us to fully assess the influence of this preference on the formulation and implementation of monetary policy. As the PBC's preference is significantly time varying and asymmetric, it is necessary to construct an extended monetary policy response function based on the asymmetric preference when regulating the interest rate. Meanwhile, the structural influence of external shocks on the model parameters should be considered from a time-varying perspective. This paper is a preliminary attempt to do so, and the subsequent theoretical research and financial practice relying on the time-varying preference of the central bank can consider setting the “zone” parameters as time-varying parameters while also including asset prices, financial stability and other factors in the central bank's target.
This paper makes the following main contributions. First, based on the existing shortcomings of the central bank's preference function, it proposes a linear exponential-power loss function that describes the “zone” and asymmetric preference. Empirical results show that our loss function has universal applicability. Second, based on Kim & Nelson (2006), we propose a two-stage time-varying parameter Bayesian joint estimation strategy, which can be widely applied to deal with endogenous problems in time-varying parameter models. Third, we investigate the influencing factors of the central bank's time-varying and asymmetric preference for the first time, and find that these factors include economic fluctuations, monetary policy cycles, preference substitution effects and economic policy uncertainty.
Keywords： Loss Preference; Real-time Data; Time-varying Parameter; Two-step Bayesian Joint Estimation
JEL Classification： E31, E43, E52

Summary： In China's new normal economy, firms find difficulties in gaining handsome returns from real business. As a consequence, the whole economic activities exhibit a trend of transforming from substantial to fictitious. This phenomena has aroused wide concerns around government regulators, academia and market practitioners as well. At the micro-firm level, the transformation of the economic activities from substantial to fictitious largely refers to that many Chinese non-financial firms invest heavily in non-cash financial assets with excess volatility and highly riskiness. This can create short-term profits for the firms, but may impede economic growth and expose the overall economy to higher risk．
In this article, we assess the impact of economic activities transforming from substantial to fictitious on capital market stability. Specifically, we focus on the effect of firm-level financialization on stock price pattern. We predict that with increasing difficulty in obtaining high return from real investment, corporate managers have strong incentive to engage in more financial investments to realize high short-term return. However, such deviation can expose a firm to higher operating risk, especially when the performance of firm's core businesses gets worse. When market participants realize that firm's financialization is driven by poor performance in its core businesses and firm's manager's tendency to protect their private benefits, they choose to sell stocks off and trigger severe crash on the market.
To formalize the idea, we first construct a three-period principle-agent model to analyze the effect of firm financialization on stock price crashes. In the model, managers differ in their capability, which determines the future cash flows of the firm. However, firms cannot directly observe a manager's capability, but have to infer it from the medium-term cash flow. Therefore, before renewing their contracts, managers with low capability are motivated to speculate on financial assets, with an intention of realizing a higher cash flow, so that they can pretend to be highly capable. This moral hazard behavior induces stock price overvaluation and implies a higher crash risk in the last period. The model reveals that firm financialization for the purpose of hiding bad news may lead to an increase in stock price crash risk.
We test for these theoretical predictions using the data of non-financial listed firms in China. Empirically, we find that firm financialization leads to a significant increase in the likelihood of stock price crashes. This positive correlation is more pronounced for firms with higher operating risk and weaker corporate governance. Our results are robust to alternative specifications including instrumental variable analysis, propensity-score matching analysis, and the inclusions of additional control variables in the model. Overall, our findings indicate that financialization serves as a tool for those firms with difficulties in operating their core businesses to ensure their private benefits at cost of excess exposure to a higher crash risk.
This article makes contributions in several ways. First, this article contributes to the literature on the economic impact of transforming the economy from substantial to fictitious, which is an important issue for scholars and practitioners in China. Some Chinese scholars focus on the incentives of financial investments, such as precautionary saving, profit pursuit and so on. However, they do not pay attention to the effect of financialization on financial stability. This article reveals a specific channel through which transforming the economy from substantial to fictitious can dampen the overall economy: Enabling corporate insiders to preserve private benefits at the expense of market participants. Second, this article finds that the incentive of using financial investments to preserve private benefits can lead to stock price crashes. Therefore, we contribute to the literature on stock price crash by revealing a new and important determinant.
This article also has important policy implications．The Chinese government has carried out several policies aiming to restrain firms' over-investment in financial assets and guide them to engage in their core businesses. Our findings indicate that these policies can help constrain corporate insiders' involvement in financial investments for their private benefits and therefore stabilize the market.
Keywords： Stock Price Crash; Firm Financialization; Fictitious Economy; Financial Market Stability
JEL Classification： G12， G18， G38

Summary： Production overcapacity has become an intractable threat to China's economic development. Since the reform and opening-up, this problem has repeatedly occurred in many fields, to varying degrees and in different forms. The central government has issued a number of related policies, but the effect has not been satisfactory.
Compared with the cyclical overcapacity in other countries, China's overcapacity is more extensive, longer and more repetitive. In particular, examining China's excess capacity at different times and in different regions and industries, we find that the capacity is in regions and industries that are neither very highly planned nor very highly marketalized, but rather undergoing the marketization process and maintaining features of the mixed economy. In these fields, both local governments and enterprises are important to the development of industry, and both obtain huge benefits from development. For example, the textile and the household appliance industries experienced severe overcapacity in the mid-1980s and early 1990s, respectively. At that time, the two industries were those transitioning from planning to marketing and were the “leading industries” in many local economies. However, these two industries have not experienced large-scale overcapacity since they finished their overall market-oriented reform and achieved market-based resource allocation. For another example, the steel industry showed the most severe excess capacity in this round of the business cycle. For quite a long time after 1978, when little market reform was seen, the industry experienced severe shortages. Since the mid- and late 1990s, their overcapacity has arisen alongside the incomplete reform.
Based on this observation, we analyze the causes of excess capacity in China from the perspective of the interaction between local governments and enterprises according to the characteristics of China's project investment by considering capacity as the matching between local governments and investment enterprises in the project market. We assume that both local governments and enterprises are competitive, have critical impacts on industrial capacity and derive returns from the matching. Thus, based on the standard matching theory, we show that (i) industrial production capacity is optimal only when market participants' shares of returns from the project are equal to the proportions of their contributions, and (ii) there is an excess (lack) of production capacity if the government's proportion of returns is greater (smaller) than its share of contributions to the project. Therefore, the difference in distribution of contributions and earnings between the government and enterprises leads to different capacity statuses in different periods, regions and industries.
To test the theoretical predictions of this paper, we use the time and the intensity of administrative examination and approval reform as proxy variables for local government revenue-sharing capabilities and estimate the impact of changes in local government return shares on excess production capacity with panel data taken from 30 provinces and 19 manufacturing industries from 2001 to 2012. The results show that local government revenue-sharing capability significantly reduced the manufacturing industry overcapacity rate, that the approval center enhanced the capacity usage rate more than 10%, that the establishment time increased by a year would improve the usage rate about 2.5%, and that the center type raised at one level would improve the usage rate more than 2% during the sample period. Results of sub-industry analysis show that these conclusions are more prominent in state-owned enterprises, high monopoly industries, heavy industries and industries with serious overcapacity.
This paper makes the following contributions. First, our analysis offers a theoretical criterion for optimal capacity and regards excess and insufficient capacity as deviations from optimal capacity. Second, our theory explains the different scale, ownership and industrial overcapacity problems and how they change with the promotion of the reform process. Third, we check the model based on the recent reform of the local administrative examination and approval system, and estimate the impacts of changes in local government return shares.
Keywords： Overcapacity; Project Matching; Local Government; Reform of Administrative Examination and Approval System
JEL Classification： E02, E22, H11, L60

Summary： Technical change is an important source of total factor productivity (TFP) growth. Either neutral or biased technical change (BTC) is significant for understanding TFP improvement. However, few studies have addressed the implications of BTC on the measurement of TFP (Antonelli & Quatraro, 2010, 2014; Zuleta, 2012; Antonelli, 2016; Feder, 2017a, 2017b). The literature paid much attention to the shift effect and nearly ignored the bias effect (Antonelli & Quatraro, 2010), which has made it impossible to fully understand the role of technological progress in the change of TFP.
This paper aims to investigate deeply the influence of BTC on TFP growth and its driving mechanism. It follows Acemoglu's (2002) normative definition of factor-biased technical change and its identification criteria. Using the Kmenta approximation technique, the TFP growth rate function including the BTC index is derived from a standardized CES production function. From the perspective of BTC, our paper visually reveals the mystery of the dynamic evolution of TFP growth.
Theoretical analysis based on the combination of capital-labor factors shows that a change in TFP growth rate in a non-neutral technology situation depends on the congruence between BTC and factor efficiency growth, the level of capital deepening and the TFP growth rate. Specifically, first, the congruence between BTC and the level of capital deepening affects the direction and magnitude of the change in TFP growth. Second, the level of congruence between BTC and factor efficiency growth affects the direction and magnitude of TFP growth. Third, the direct impact of BTC on the TFP growth rate is implicit in the productivity effects of factor efficiency growth rates. Fourth, the direction and magnitude of the impact of the capital-deepening growth rate on the TFP growth rate depends on the level of congruence between the elasticity of factor substitution and factor efficiency growth.
Using data taken from China's industrial sector from 1998 to 2016, the preceding mechanism is analyzed. The main conclusion is that the factor efficiency growth rate is the basic force behind the increase in the TFP growth rate in China's industrial sector. Capital-biased technological change explains most of the TFP growth. Policy holds that when introducing and using technology, enterprises should fully consider the level of consistency between the technical change and factor endowment, factor substitution elasticity and factor efficiency growth of local departments， to adopt appropriate technology that is beneficial to TFP improvement.
This paper contributes to the literature in three ways. First, it captures the two key parameters of substitution elasticity and factor efficiency growth rate， and clearly depicts the mechanism behind biased technological progress, which differs significantly from the biased technological progress represented by the variable factor share or the output elasticity in the current growth accounting literature. Second, the standardized CES production function used in this paper effectively circumvents the index number problem and provides support for the non-linear setting of the variable growth rate of technology change used by Klump et al. (2007), reducing the estimation error of substitution. Third, the paper reveals the conditions and reasons of the positive or negative impact of BTC on the TFP growth rate, and deepens understanding of the mechanism behind TFP growth and its evolution when BTC is fully considered. Our findings further enrich and expand the content of technological congruence formally proposed by Antonelli (2016) and enhance its power to explain TFP growth.
In terms of empirical research, future studies may consider increasing the types of factor inputs, relaxing the assumption that scale returns are constant and allowing the elasticity of substitution between any two production factors to be variable, which should make the impact of BTC on TFP growth closer to the impact seen in the real economy.
Keywords： Total Factor Productivity Growth; Biased Technical Change; Technological Congruence; Substitution Elasticity; Capital Deepening
JEL Classification： O30, O40, O47, O14

Summary： The real effects of managers' pay structure have been well studied. However, few papers have examined the real effects of employees' pay structure. As the pension insurance is the most important kind of insurance in China, pension contributions take a large part of employees' pay and place a heavy burden on firms. According to statistics presented by Nielson & Smyth (2008), employee pension fees on average comprise 40%—50% of total labor costs in Chinese firms, significantly higher than in other Asian countries.
Whether pension burden hinders or enhances firms' productivity is still unclear in the literature. In our opinion, the optimal pension rate is at equilibrium, where the marginal costs of increasing the pension contribution rate are equal to the marginal benefits. The costs of increasing the contribution rate are as follows. First, increased employee contribution rates lead to increased labor costs, which may crowd out firms' cash flow for innovation. A decrease in innovation input may eventually lead to a decrease in productivity. Second, faced with increasing pension fees, firms transfer part of the burden to employees, lowering their disposable income in the current period and leading to a decrease in employee effort.
Increasing the pension contribution rate also has three benefits. First, pension fees can be deducted from an employee's pay before tax, so increasing the contribution rate is a kind of personal tax avoidance for employees. Second, the government operates the pension fund, and the return rate may be higher than that of the investments operated by employees. Lastly, pension contribution are enforced deposit and can ensure the basic living spending of employees after retirement. Increasing the contribution rate means ensuring better living standards for the retired.
Using Chinese listed non-financial firm data from 2007 to 2015, this paper investigates the causal correlation between the employee pension contribution rate and firms' productivity， and the potential mechanism behind it. We construct two measures of firms' employee contribution rate. The first is the firm-level effective contribution rate, calculated based on the financial data obtained from the detailed disclosure of listed corporations' annual report footnotes. The second is the exogenous city-year level statutory contribution rate, calculated based on firms' headquarter locations. We measure productivity using the residual of the Cobb-Douglas production function adjusted based on the Olley & Pakes (1996) method. We find that firms' effective contribution rates are negatively correlated with productivity； and we use the different trend of the statutory contribution rates in different cities to identify the causal impact， and find the same result. We then separate the sample into two parts based on the yearly mean of average employee wage， and find that the negative correlation holds only in the low employee wage sample. In addition, high contribution rates increase firms' labor cost proportion of total sales and decrease employees' disposable income in the current period at the same time. Meanwhile, a high contribution burden crowds out innovation output.
Our study contributes to the employment tax research (Dyreng & Maydew, 2018). Despite the great deal of empirical evidence for the economic consequences of managers' pay structures, there is a lack of papers investigating the effects of employees' pay structures. We find that an increase in the employee contribution rate hinders firm productivity.
Our study also contributes to the emerging literature linking labor economics to corporate finance research. Research shows that labor protection laws increase firms' adjusting cost, financial constraints and employee's bargaining power, and hence influence the firms' investment, financing and information disclosure behavior. However, there is mixed evidence for the effect of labor protection on productivity. Our study suggests the dark side of pension contribution rates.
Finally, our empirical results support the ongoing pension system reform in China. Given the different effects of a high pension contribution rate on productivity among high-and low-pay samples, we suggest that the government should decrease the basic statutory pension contribution rate and encourage firms and employees to buy enterprise annuity funds and commercial retirement insurance voluntarily.
Keywords： Pension Insurance； Contribution Rate; Productivity; Employee Wage
JEL Classification： H55, J31, D24

Summary： At present, China must simultaneously deal with the slowdown in economic growth, make difficult structural adjustments, and absorb the effects of previous economic stimulus policies. The characteristics of the new normal of economic development have emerged, requiring China to innovate its development model and take the path of innovation-driven development. However, regardless of the cultivation of individual innovation ability, the improvement of enterprise innovation ability or the formation of social innovation vitality, human capital is the core element. Therefore, understanding the formation mechanism of human capital is the key to China's sustained economic growth and industrial structure transformation and upgrading.
Some studies have shown that education and health are the main types of human capital formation, but whether human capital formation is a natural phenomenon or a human impact during economic development deserves further research. At the moment, the research on human capital formation is mainly based on the neoclassical analysis framework. This is bound to introduce an irreconcilable dilemma: human capital formation is based on its high reward, but there are many interference factors of the skill premium of human capital so complete market cannot be realiged under imperfect competition conditions. Meanwhile, only a few scholars have carried out theoretical research on factor endowment and human capital formation. Moreover, the academic community has not paid much attention to the influence of the inherent phenomenon of the wage inequality development process on human capital formation.
By introducing a constant elasticity of substitution production function, the monopoly competition hypothesis and an extended heterogeneous enterprise trade model, this paper discusses the factor return determination mechanism under the conditions of factor market clearing, builds a dynamic evolution model of human capital formation under the conditions of factor endowment heterogeneity and wage inequality， and empirically analyzes the impact of factor endowment on human capital formation against the background of wage inequality.
This paper arrives at three findings. First, the increase of capital stock inhibits human capital formation, but the abundant supply of labor is favorable for human capital formation. Second, the wage inequality between high- and low-skilled labor has a significant positive impact on human capital formation. Third, wage inequality significantly promotes the incentive effect of capital stock on human capital formation, but significantly represses the incentive effect of labor on human capital formation.
Therefore, this paper puts forward the following policy suggestions. The government should increase investment in education to promote the transformation of low-skilled labor into human capital. Meanwhile, the government should accelerate industrial structure transformation to open up a broad demand market for human capital formation. This would improve the mechanism of income distribution, so that human capital investment can be paid accordingly, increase the skill premium level of skilled personnel to improve innovation and creativity， and supply fertile soil for human capital formation.
This paper makes the following main contributions. First, it creatively introduces heterogeneous labor to extend the heterogeneous enterprise trade model， and constructs a model that includes low- and high-skilled labor and capital participation in production, describing the interactive influence and dynamic evolution of factor endowment, wage inequality and human capital formation. Second, this paper tests the impact of factor endowment, wage inequality and their mutual influence on human capital formation, providing policy references for human capital formation in China under the innovation-driven development strategy. Third, this paper verifies that the high income expectation introduced by wage inequality is an important reason for human capital formation, which means that wage inequality as a price signal is conducive to human capital formation.
Keywords： Factor Endowment; Wage Inequality; Human Capital; Dynamic Evolution Model
JEL Classification： E22, J31, L13

Summary： Countries usually implement strategic trade policies characterized by subsidizing exports. In the 1970s, Japan put into effect a strategic export subsidy policy for high-tech industries that promoted the rapid development of the automobie, household appliance and chip manufacturing industries， and greatly enhanced their international competitiveness. European countries established Airbus and provided substantial financial subsidies to support their large passenger aircrafts to compete with Boeing, which was established in the United States. The export-oriented strategy established at the beginning of China's reform and opening-up undeniably determined that China had long implemented an export subsidy policy.
China now focuses more on trade interests and welfares, so it is worth discussing whether the export subsidy policy implemented in the past is still reasonable. In addition, firms participating in international competition are likely to compete over quantity or price. According to Brander & Spencer (1985), in a duopoly model, export subsidies are better than no intervention when firms' competition is in quantity mode. Is it still reasonable to subsidize exports when the firms compete internationally over price? Under what circumstances should exports be given subsidies?
To answer these questions, we set up a theoretical model that includes some stylized facts. Chinese firms that engage in international competition often win the market through a lower price. Considering the late-development advantages, the product quality of China is always inferior to that of developed countries. Therefore, we construct a duopoly competition model based on product quality differentiation in the international market, in which firms compete over price. Due to the increasingly widespread intra-product specialization, and given that many of China's manufacturing firms rely on domestic trade enterprises for export, we also incorporate the separation of production and trade into the framework.
Results show that when a production firm exports through a domestic trade firm, the prices of products exported to the third market are relatively high due to the double marginalization, which reduces the motivation of a government to improve the terms of trade by imposing an export tax. In particular, when the quality differentiation is large, the market competition is relatively weak and the export price is high. The motivation to shift profits by lowering the prices of export products exceeds the motivation to improve terms of trade by increasing the prices of export products. At this time, the best trade policy for a government is to subsidize exports. Therefore, even in price competition, it is possible for a country to implement export subsidies, which theoretically explains why export subsidy policies are popular around the world. In addition, we find that firms participating in international competition strategically take advantage of trade policies and outsourcing their exports to domestic trade firms.
This paper makes three main contributions. First, it considers firms in developing countries, especially China, which participate in international competition through domestic trade enterprises, and mainly characterizes their products in terms of the quality differentiation between developing and developed countries. Therefore, the strategic trade policies explored in this context are more targeted and realistic. Second, we find that even in the price competition mode, export subsidies still have certain rationality in countries where production firms export through domestic firms, which helps us to understand the universality of the export subsidy policy. We also find that product quality differentiation and the export channel of a production firm profoundly affect the choice of a country's strategic trade policy under price competition. Given the improvement of Chinese product quality and the narrowing gap with developed countries, it is necessary to consider shifting from the traditional subsidy policy to the export tax policy, not only to alleviate increasing trade frictions, but also to enhance the overall welfare of China. Third, we find that trade policy may change the choice of export mode of a country's manufacturing firms.
Keywords： Quality Differentiation; Price Competition; Export Mode; Strategic Trade Policies
JEL Classification： F14, L13, L53

Summary： The location distribution of exporters is far from random, even in a relatively narrow region within a country. In contrast, the tendency of establishments to cluster within some areas has been a well-perceived economic phenomenon in China. For example, in 2006, out of all 2932 counties where export firms were mostly concentrated, over 77% of the firms were clustered in the top 100 counties. More interestingly, more than 3500 of these firms were gathered in Shenzhen Baoan, a district less than 400 square kilometers in size. Motivated by these facts, in this paper, we step back from the thorough industrial organization literature to explore the location pattern of export firms by raising simple questions: do firms export to the same geographically concentrated counties in China relative to overall distribution? If this is the case, how can the phenomenon be explained?
A major issue arises when answering these questions: we must ex ante distribute firms into specific administrative units and then rely on administrative units to examine the firms' location pattern. This approach transforms spatial spots (firms) into uneven black boxes (administrative units) and thus artificially distorts the attributes of agglomeration. To overcome this challenge, we use the distance-based approach proposed by Duranton & Overman (2005) (DO approach). This approach has been widely used for agglomeration studies but is rarely present in the Chinese literature due to a lack of data availability. Relying on detailed and unique coordinate data, we apply this approach to test destination-specific agglomeration, controlling for industry clusters in China. The main findings suggest that firms selling to the same destinations appear to be geographically concentrated, revealing the existence of a novel location pattern of export firms in terms of spatial distribution in China, referred to as export agglomeration by destination.
To explain this phenomenon, we analyze typical facts and empirically exploit the effects of export barriers in shaping the destination-specific location pattern. Our main findings suggest that firms selling to countries with worse business regulations and larger gaps in ideology and language than China tend to cluster significantly more in specific regions. Additionally, we conduct various robustness analyses and obtain consistent empirical evidence that destination-specific export barriers significantly affect export firms' location decisions.
Our work makes three marginal contributions to the present literature. First and foremost, a large body of economic geography literature examines the geographic agglomerations of firms from the perspective of industrial concentration. However, little literature has focused on the spatial distributions of export firms. We provide a novel technical explanation for the location distribution of China's export firms from the perspective of overcoming export barriers.
Second, our research approach and unique data contribute to the Chinese literature. Based on recently available nationwide coordinate data, this paper tests the effects of destination-specific agglomeration on continuous space and consequently extends beyond the restrictions placed on administrative units. Additionally, considering that the DO approach was initially developed to study the location patterns of industries, we also contribute to the trade literature by introducing a novel industrial organization research method.
Finally, one of the major export barriers that exporters face in export markets is the difficulty of obtaining destination-specific export information. However, little literature aims to provide empirical evidence of the effects of export barriers on firm behaviors (particularly from the perspective of spatial distribution in terms of exporters). The main findings in this paper provide indicative indirect evidence that export barriers can affect the agglomeration behavior of firms, and that agglomeration affects spillovers through the information-sharing mechanism. Consequently, they reveal a survival rule for exporters looking to conquer tough export markets.
Keywords： Origin Agglomeration; Institutional Environment; Export Barriers; Spatial Statistics
JEL Classification： F14, D21, R12

Summary： After a long time spent using legal regulation and introducing market-based instruments such as tradable discharge permits and pollution charges for pollution control, western countries have widely adopted environmental information disclosure policies. Environmental information disclosure policies aim to increase public access to environmental information and encourage investors to engage in environmental governance actions. If investors are concerned about firms' environmental performance, providing more firm-specific environmental information may induce them to adjust their investment portfolios in financial markets and then press firms to improve their environmental behaviors. In recent years, China has also adopted environmental governance disclosure policies, and environmental protection departments at all levels release corporate environmental violations within their jurisdictions. Studies show that environmental information disclosure policies in developed countries such as the United States have functioned well to control pollution through the financial market channel. However, there remains a lack of in-depth studies of how China's environmental information disclosure policy has worked and the reasons behind this.
Investors' punitive reaction to corporate environmental violation information is the key to the success of disclosure policy through the financial market channel. This paper systematically examines market reactions to the release of corporate environmental violations and the corresponding penalties, and furthermore investigates the institutional and social factors causing the failure of environmental disclosure policies. Our empirical results show that contrary to practices in developed countries, China's environmental information disclosure policy is basically ineffective through the financial market channel. Further analysis shows that the low environmental responsibility in environmental legislation and the loose enforcement and supervision lead to a low environmental violation cost, which is a primary reason for the failure of the disclosure policy through financial market channels. Using event study methods, we find that due to the generally low environmental penalties, investors do not react significantly when corporate environmental penalties are released. However, we also find that investors' punitive reaction is significantly enhanced along with the improvement of environmental regulation stringency, which increases illegal firms' exposure to environmental risk. Our empirical results confirm that government subsidies obtained by firms to some extent reflect the degree of political connection, and that a political connection can reduce environmental risk due to the protection of the local government by showing that investors' punitive reactions are weaken when firms receive more government subsidies. Finally, we find that some social factors also contribute to the failure of the disclosure policy, including investors' awareness of environmental protection and media coverage on and social attention paid to environmental pollution.
This paper makes several contributions. First, by comprehensively collecting corporate environmental violation information released by environmental protection departments at all levels, we identify the market's pre-reaction before the information is disclosed, and then reach the more robust conclusion that China's environmental information disclosure policy is basically ineffective through the financial market channel. Second, this paper provides institutional reasons for the failure of the disclosure policy from the perspectives of legislation and law enforcement. The impacts of local environmental regulation stringency and corporate political connection on the effectiveness of the disclosure policy are also examined, which we believe enriches the literature on the relationship between environmental information disclosure and capital market reaction from the perspective of institutional factors. Furthermore, by comparing the different impacts of environmental violation events for the same firms simultaneously listed on the A- and H-share markets, we emphasize that investors' insufficient awareness of environmental protection is also an important reason for the failure of the disclosure policy.
Keywords： Disclosure of Environmental Information; Environmental Regulation; Political Connection; Media Disclosure; Social Attention Paid to Environmental Pollution
JEL Classification： G14, G23, Q58

Summary： In traditional China, local infrastructure projects were generally organized and undertaken by the people themselves, while river crossings, covered bridges, charities and other similar projects were usually set up by philanthropists. This paper comprehensively discusses the organizational model and the governance structure of public facility construction, demonstrates the property rights of legal entities in Chinese history for the first time, and systematically investigates the property rights foundation of various social organizations to promote reflection on and understanding of traditional grassroots society.
First, local infrastructure construction is based on a relatively mature organization and its governance structure. Council members are selected by the people and are responsible for the financing, construction, operation and maintenance of the infrastructure. The council's administration and management are open and transparent, and it is capable of achieving cross-regional coordination and handling disputes.
Second, river crossings and covered bridges are a kind of non-profit and non-government public interest project. In a time of economic shortage, the ability to mobilize and organize people reflects the creativity of social organizations. Public goods are provided by the people in the form of free services, which was seldom done in the past. This is quite different from the direct undertakings of the government and profit-driven companies. From a moral viewpoint, it is respectable, but it has inherent limitations compared with the contemporaneous Britain and American market players.
Moreover, legal entities own independent properties, mostly real estate and farmland, in addition to endowments with future value added earnings, which are used for long-term maintenance and operations with rules and regulations. Their exclusive legal property rights have integrity and are indivisible and guaranteed by the government and law.
Last but not least, these social organizations play their respective roles in various aspects of economic and social life, both as an intermediary and bridge for the government to connect, communicate and coordinate with the grassroots level and as institutional foundations to ensure the low-cost maintenance of the unified regime.
In traditional China, most grassroots affairs were managed by the people themselves. The order and system were spontaneous, but believing that traditional Chinese lacked the ability to organize themselves reflects misunderstanding and prejudice. In fact, China's grassroots society has a tradition of original democracy, forming a relatively mature institutional arrangement. Furthermore, these social organizations own independent properties with clear rights, so future benefits are guaranteed. Their independence allows them to exist and develop without relying on power politics. They also form an effective organizational system with the governance structure, which operates in an open and transparent manner and is accountable to the society and multiple interest groups. Lastly, their effective incentive and restraint mechanisms are not only directly related to economic interests, but also coordinated with hardworking employees and with religious, ethical and moral leaders who devote themselves emotionally to management. At the same time, strict regulations and public oversight have avoided pockets and laches and helped organizations to effectively overcome rent seeking and corruption.
In short, due to the independent property rights of legal entities, clear constitutive regulations, an effective governance structure, open and transparent management operations, encouragement of social and economic interests， and supervision and restraint of the public, the institutional arrangements of traditional Chinese social organizations are fruitful and enlightening.
Keywords： Public Infrastructure; Property Rights of Legal Entities; Social Organizations; Governance Structure; Order in Grassroots Society
JEL Classification： N00, L31, H40