The Study On Capital Allocation Efficiency In China Based On Contract Theory

The capital reallocation has contributed a lot to the improvement of aggregated TFP in the recent thirty years in China. But the capital misallocation is still severe for China, compare to the advanced countries. On one hand, the capital allocation towards SOE firm causes capital misallocation. On the other hand, the inefficiency of financial intermediaries in China also causes the capital allocation efficiency. The latter reason is getting more and more important. Based on contract theory and the Chinese industry survey data, we analyze the mechanism of capital allocation of Chinese financial market.Firstly we build a dynamic model based on dynamic contract theory to analyze the dynamics between a lender and a borrower, in order to answer the question why small or new born firms face tighter financial constraint. Secondly we build a general equilibrium model based on contract theory, to analyze the phenomena that the formal banking system and informal banking system coexist. Lastly we calculate the return on capital in the Chinese industrial firms during 1998 and 2008, and decompose the change of ROC to find the relation between ROC and capital allocation.The main finding of this paper is as follows. Firstly, we find that although it’s the optimal design that small firms face tighter financial constraint, but in fact the efficiency of financial intermediaries’ efficiency decides the financial constraint level. Higher financial intermediary efficiency leads to less tighten financial constraint, thus better capital allocation and higher aggregated productivity. Secondly, we find that the main reason why informal banking system exists is the financial repression, rather than the comparative advantage of informal banking. Thirdly, when the competition of formal banking system is high, the interest rate market reform will decrease the deposit and loan spreads, thus improve the capital reallocation efficiency, otherwise the contrast. Lastly, the capital reallocation helps with the rising of Chinese firms’ ROC indirectly. But as the capital reallocation is almost done, the rising of ROC will be slower.The paper is organized as follows. Chapter 1 is an introduction. Chapter 2 surveys the literatures concerning the theme, and introduces the dynamic contract theory, which is an important tool in this paper. Chapter 3 gives a dynamic contract model to analyze the dynamic lending relationship between a firm and a financial intermediary. Chapter 4 gives a general equilibrium model in which the formal banking and informal banking co-exist. Chapter 5 analyzes the effect of capital reallocation on the return of capital. Chapter 6 concludes.