Research On The Soft Budget Constraints Of Chinese Public Universities During Transition Period

In order to cope with the Asian financial crisis, stimulating domestic demand and promote economic growth, to speed up the development of higher education, China government made a great decision of the College Expansion Plan in 1999. Chinese higher education began to enter into a rapid development phase. The gross enrollment rate of higher education increased rapidly from 9.76% in 1998 to 30% in 2012. To achieve the higher education mass stage rapidly is a great achievements of milepost meaning in Chinese education history.However, based on administrative policy guidance of governments and fitting with the interests of universities and banks, Chinese universities started a history relying on large loan because of the dual pressure of huge construction funds demand of the large-scale enrollment expansion and weaken strength of government financial. The excessive debt problem of universities has aroused great concern from the whole society. After ten years of College Expansion, the central government and the part of local governments began to defuse the risk of work in universities debt.This leads to a question:"why Chinese universities liked to break the budget balance principle and make a huge debt and a serious financial crisis, and why government shoulded be responsible for it and come to rescue?" It is actually a soft budget constraint (SBC) problem. The SBC problem can easily lead to many problems of public universities, such as excessive loan, financial risk, private benefits of control, adverse select and moral hazard. It seriously affect universities’ financial security, Management efficiency and sustainable development and higher education imbalance. How to solve this problem, not only in relation to thehigher education enterprise long-term stable development, will also affect the smooth implementation of comprehend-sive deepening education reform and public finance reform, as well as relate to the national strategy of developing the country through science and education and the strategy innovation driven development strategy.From the perspectives of complete contract theory and incomplete contract theory, this paper deeply discussed the SBC phenomenon of Chinese universities. During the special transition period of College Expansion, the research shows that Chinese public universities have occured the serious problem of SBC because of the Interaction of external and internal factors of policy burden and benefits private benefit of control. Then on the basis of regulation economics, it discusses the ratchet effect and incentive mechanism of public universities. Finally it put forward the governance advice to aim at the SBC of public universities.The research works of this dissertation are mainly as follows:1) The second chapter analyzes the change of investment system of higher education and the status of budget management and loan. The SBC of public universities mainly includes soft bank credit, financial subsidies, soft taxation, domestic debt and default on construction cost. Guided by government policy, in order to solve the construction fund demand of large-scale expansion brings, Chinese universities created a history relying on large loan and began to bear a heavy policy burden.2) From the perspective of the complete contract theory, use of DM’s dynamic inconsistency theory, the third chapter constructs an analysis framework for the SBC problem of of public universities. Due to the sunk cost effect, investment projects of public universities are easily lead to adverse selection and moral hazard problems, resulting in the SBC with "ex-ante inefficient, ex-post efficient". Then the paper studies the impact of policy burden on universities loads and soft budget constraint. During the transition period, governments has the incentive to make universities undertake the policy burden, because they capture profit from political interests, macro economic and social development more than the ex-post subsidy. It is the University appears root problem of soft budget constraint. When universities ubdertake policy burdens, to maintain the moderate level SBC is a suboptimal systematic arrangement and governments should strict loan approval system and limit their loan autonomy.3) From the perspective of incomplete contract theory, the fourth chapter constructs a model between private benefit of control and SBC. Due to the existence of private benefits of control, the reinvestment condition was turned ex-post efficient into ex-post individual effective and lead to the emergence of the "ex ante inefficient, ex post inefficient" of SBC of public universities, and thus deepened the SBC degree. Then, the controllers’effort is divided into rent-seeking effort and productive efforts. The effort to increase the investment project returns by controllers will be reduced due to private benefits. In addition, private benefits is divided into material and spiritual of two types and the spiritual private benefits can incentive controllers to work properly.4) Based on regulation economics, the fifth charper analyzes how to design the optimum agency contract between government and universities. The contract should will induce universities of different efficiency types to choose the optimal effort level. The research shows that the government also needs to pay subsidies to universities, even under the condition of complete information. In order to reduce the rent, the government will choose to deviate from the optimal configuration and close to the low intensity scheme, which distorts the allocation of resources of higher education to a certain extent. Secondly, this charper studies on the relationship between the policy stability of higher education and the ratchet effect. The paper establishs ratchet effect model of infinite stages based on mutually-trust System and obtains the Trust critical point and The stability conditions between government and universities. Studies show that the stability of mutually-trust System depends not only on the level of mutual belief, also on the size of the discount factor. The stability and continuity of higher education policy improved by the government can improve the implementation of the mutually-trust System and help to improve the income of government anduniversities.5) The sixth chapter firstly summarizes the adverse consequences of the SBC problem of universities and gives the policy recommendations how to governance the SBC of public universities. Firstly, the suggestion to harden the budget constraints of universities is put forward that to reform the corporate governance structure, relieve the policy burdens and reform the budget management system of universities. Secondly, from the aspect of reducing the effect of private benefits of control, optimizing agent contract and enhancing policy stability, the paper advises to improve the incentive mechanism between government and universities. Finally, in a particular period and specific circumstances of transition period, to maintain the moderate level SBC has certain rationality for universitie.