Township Enterprises Reconsidered: One Based On Relational Contract Theory

The purpose of this paper is to probe into the micro-mechanism of China's township enterprises' development and their property right transition. Since China's reform and opening-up, China's township enterprises develop rapidly, and became the main force of national economy. Unfortunately, after mid-1990s, the development of township enterprises began to get into a difficult position, which caused serious discussions. However, the majority of discussions concentrate on property right transition, industrial structure, managerial skill, etc. There is little research on the township enterprise from the viewpoint of relational contract. The relational contract theory can be taken as a basic micro theory on China's township enterprises because relational contracts are the basis of China's township enterprises' formation and of their operation.When market mechanism is so imperfect that opportunist behaviors appear, the relational contract formed is an effective way to reduce transaction cost. It can be concluded from the relational contract theory that the relational type characterizes a transitional economy. It is an inevitable fact that China's township enterprises' transition from the relational type to the contractual type not only implies that China is evolving from a relational economy to a contractual economy, but Chinese economy also realized its successful transition.The relational contract theory which has successfully explained the mechanism of China's township enterprises' development and their transition is a theoretical innovation in this thesis. With transaction cost analysis, the relational contract theory applies methods from contract theories, incentive theories, and game theories in economics. To make it more intuitive, case analysis has been utilized in analyzing the mechanism of enterprises' operation.