CONTENTS

Chinese Local Government, Soft Budget Constraint and Expansion-biased Fiscal Behavior

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Fang Hongsheng and Zhang Junª« (4)

Compelled Technological Change, Unbalanced Growth, and China's Business Cycle

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Yuan Jiang and Zhang Chengsiª«   (17)

Accounting for Urban China's Earning Inequality: 1990¡ª2005

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Chen Binkai, Yang Yishan and Xu Weiª«   (30)

Land Rights, Nonª²agricultural Employment Opportunities and Farmers¡¯ Agricultural Investment

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ Zhong Funing and Ji Yueqingª«    (43)

Macroeconomic Conditions and Corporate Capital Structure

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Su Dongwei and Zeng Haijianª«     (52)

Impact of Energy Price Increase on General Price Level in China

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ Lin Boqiang and Wang Feng ª«     (66)

Unbalanced System Change and Economic Growth: An Rentª²seeking Model

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ Huang Shaoan and Zhao Jian     (80)

Credit Expansion, Supervisory Mismatch and Financial Crisis: Crossª²country Evidence

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Ma Yong, Yang Dong and Chen Yulu     (93)

Allocation of Power within a Firm: A Cooperative Game Model

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ Lu Zhoulaiª«     (106)

Background Risk and Investors' Participation in Risky Financial Assets

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ He Xingqiang, Shi Wei and Zhou Kaiguoª«      (119)

Prosocial Behaviors and the Decomposition of Social Preferences

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Chen Yefengª«       (131)

A Summary for the 9th Forum of Young Economists in China

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ He Jie, Ma Xiao and Yang Danª«     (145)

A Book Review

ª«  ¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Lu Fengª«      (151)

Chinese Local Government, Soft Budget Constraint and

Expansion-biased Fiscal Behavior

Fang Hongsheng and Zhang Jun

(Zhejiang University of Finance & Economics;

China Center for Economic Studies,Fudan University)

Abstract:Based on the latest empirical literature, it estimates Chinese local government's cyclical policy response function using an annual balanced panel for 27 provinces over the period of 1994¡ª2004 and System GMM method. We find, whenever based on total expenditure or decomposed expenditure, Chinese local governments conduct a more active expansion-biased fiscal policy during the recession than during the boom. It thinks that this policy response is an interactive outcome of Chinese-style fiscal decentralization and soft budget constraint. Then, it verifies our hypothesis using two government competition indicators. Finally, we give relevant policy suggestions.

Key Words:Anti-cyclical Fiscal Policy; Procyclical Fiscal Policy; Government Competition; soft Budget Constraint

JEL Classification:D78£¬E69

Compelled Technological Change, Unbalanced Growth,

and China¡¯s Business Cycle

Yuan Jiang and Zhang Chengsi

(Agricultural Bank of China; Renmin University of China)

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Abstract:Based on compelled technological change hypothesis and the unique features of economic growth and structure in China, this paper develops an extended AS-AD framework by incorporating excess production and structural imbalances. The article employs the underlying framework and explains the interactions among economic fluctuations, unbalanced growth, wave phenomenon, and prices disparity in China. Using data over 1978¡ª2007, the paper provides empirical evidence showing that national control power and technology import have significant impacts on investment, prices, income gap, and economic structure in China. It also shows that increase in income gap is an important factor that drives down effective demand in China. The finding in this paper raises new questions and implications in analyzing the features of economic growth in China with traditional macroeconomic framework.

Key Words:Compelled Technological Change; Unbalanced Growth; Business Cycle

JEL Classification:E32, E39, E58

Accounting for Urban China's Earning Inequality: 1990¡ª2005

Chen Binkai, Yang Yishan and Xu Wei

(School of Economics, Central University of Finance and Economics;

School of International Economics and Trade, Shandong University of Finance;

CCER, PKU)

Abstract:Combined the newly developed Shapely Value Decomposition method with Heckmantwo-step estimation, this paper accounts for the level and difference of urban China's earning inequality by gender, education, district, and experience, using the data of China Health and Nutrition Survey(1990¡ª2005). We find that: (1) Selection bias is important in accounting urban earning inequality; (2) Contribution of education to urban earning inequality tends to increase; (3) Contribution of experience to urban earning inequality decreased continually; (4) Contribution of district to urban earning inequality increases. Technology progress, rapid industry structure change during economic growth and property right system reform, wage system reform, restructuring of state-owned enterprises during the process of transition are potential interpretations for these findings.

Key Words:Earning Inequality£»Heckman Twoª²step Estimation£»Shapely Value Decomposition

JEL Classification:O150£¬O180£¬C710

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Land Rights, Non-agricultural Employment Opportunities

and Farmers¡¯ Agricultural Investment

Zhong Funing and Ji Yueqing

(College of Economics and Management, Nanjing Agricultural University)

Abstract:The importance of land rights to farmers' agricultural investment seems being widely accepted. Through comprehensive study of the relationships between land rights and farmers¡¯ agricultural investment, it is found that secured land rights have no significant impact on farmers¡¯ total agricultural investment and land rental market; and that land rights, land transfers and leases, perse, may not lead to expansion in farm scale and agricultural investment without non-farm employment opportunities. Due to the current small farm size and low profitability in agriculture, financial institutions are not willing to provide loans to farmers even land is permitted to be the collateral. It is also found that, along with accessibility, the size and profitability are not only major factors indetermining agricultural investment, but also major determinants of accessibility to loan itself, as they are important guaranty of paying back the loan. As the seemly insecured land rights due to periodical redistribution does not significantly impact the farm scale and profitability, it may not have significant impact on farmers' accessibility to loan, and on agricultural investment. Therefore, further reform of the land rights and land market systems may not have significant impact on farmers' agricultural investment under current situation; increasing non-farm employment opportunities is the key of expanding farm size and improving farm profitability, hence the key of promoting farmers¡¯ agriculture investment.

Key Words:Land Rights; Nonª²agricultural Employment Opportunities; Farmers¡¯ Agricultural Investment

JEL Classification:Q150£¬Q120£¬R200

Macroeconomic Conditions and Corporate Capital Structure: Evidence from Publicly-listed Firms in China during 1994 and 2007

Su Dongwei and Zeng Haijian

(College of Economics, Jinan University)

Abstract: This paper uses a novel approach in testing various theories of capital structure, taking into consideration the unique institutional background and corporate governance characteristics inherent in publicly listed firms in China.The paper posits that macroeconomic conditions affect corporate capital structure and derives several testable hypotheses based on the trade-off, pecking order and market timing theories.It then estimates a panel data fractional response model and a panel data quartile regression model.The paper finds that corporate capital structure is counter cyclical, significantly negatively related to proxies of default risk, but unrelated to credit quota and stock market performance.The empirical results are consistent with the pecking order theory but are against the trade off theory and market timing hypothesis.The results also suggest that corporate financing choices vary with macroeconomic conditions.During a period of economic boom, firms prefer internal financing over equity and debt.However, during a period of economic downturn, firms generally prefer debt over equity.

Key Words:Capital Structure, Macroeconomic Conditions, Trade-off Theory, Pecking Order Theory, Market Timing Hypothesis

JEL Classification:G32, E20, C33

Impact of Energy Price Increase on General Price Level in China:

A Study Based on Input-output Model and Recursive SVAR Model

Lin Boqiang and Wang Feng

(Xiamen University)

Abstract:The impact mechanism of energy price on China¡¯s general price level is one of the important issues needed to be studied in the process of reforming energy pricing mechanism. It is also important for the macroeconomic decision-making. This paper firstly applies input-output price impact model to simulate the variations of China¡¯s general price level caused by energy price increases in two scenarios: (i) energy price is controlled by, and (ii) is not controlled by the government. The results show that even assuming the increases of energy prices could be transmitted completely and smoothly into the general price level, the energy price increase has relatively weak impact on the general price level, if the effect of price expectation is not considered. Price control does have certain impact on the passing-through of the energy price into the general price level. Further, based on the recursive SVAR model, this paper also investigates the time-lags between the energy price increases and the rises of general price level. The results indicate that the increase in energy price has little impact on PPI in the first month but will cause PPI to increase significantly after six months. Because of the weak impact on CPI, the lag time from energy price increase to CPI could not be fully displayed. However, the increase in PPI will have a persistent impact on CPI, after a five months lag.

Key Words:Energy Price£»General Price Level£»Inputª²output Model£»SVAR Model

JEL Classification:Q43, D57, C22

Unbalanced System Change and Economic Growth: An Rent-seeking Model

Huang Shaoan and Zhao Jian

(Center for Economic Research, Shan Dong University)

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Abstract: This paper builds a rent-seeking model in an unbalanced system change where political system remains stable but economic system is in market-oriented reform, finding that when politicians control the redistribution power of resource, in the process of market liberalization, besides the efficiency of political system, the exogenous market restraints such as market structure and demand elasticity also determine the firm¡¯s optimal rent, which leads to both rent dissipation and short-term economic growth. However, in Solow economy with rent dissipation, the growth that can¡¯t converge to balanced path for the sake of rent restrain, can be restricted in a lower capital level. We try to research the reason of unbalanced system change, suggesting the long-term economic growth depend on the harmony between political system and economic system.

Key Words: Politic System; Economic System; Unbalanced System Change; Rentª²seeking

JEL Classification:D11,O20

Credit Expansion, Supervisory Mismatch and Financial Crisis:

Cross-country Evidence

Ma Yong£¬Yang Dong and Chen Yulu

(China Financial Policy Research Center)

Abstract:Based on the economic data of 66 countries, this paper investigates the internal relationship between credit expansion, financial regulation and financial crisis. Empirical analysis tends to show that the procyclical interactions between credit expansion, asset prices and financial supervision are the basic mechanism behind financial crisis. Under the effects of procyclicality, financial crisis obtains the self-fulfilling way of accumulation and magnification, while the mismatched and ineffectual financial supervision not only has no use in preventing crisis but also may lead to even worse outcomes.

Key Words:Credit Expansion; Supervisory Mismatch; Financial Crisis

JEL Classification:F30£¬G18

Allocation of Power within a Firm: A Co-operative Game Model

Lu Zhoulai

(Economic Research Center,China National Defense University)

Abstract:The theory of constructing the first-best contract, represented by TCE (transaction cost economics) and GHM (Grossman-Hart-Moore), doesn't solve the problem of source, allocation and enforceability of power within the firm. Bargaining power in the co-operative game model developed by Aoki isn¡¯t endogenetic Under the framework of co-operative game theory, we can educe the conclusion below: The power within a real firm is the outcome of bargaining between contractors, whose size of control power is determined by his size of bargaining power. Only by this, the power within a firm is not only existent but auto-self-enforcing. And the size of bargaining power and thus the control power within a firm is determined by the size of substitutable and in inverse proportion to latter. Moreover, the attitude to risk can affect bargaining power and thus the allocation of power within a firm.

Key Words:Theory of Firm£»Allocation of Power£»Bargaining Power£»Co-operative Game

JEL Classification:D230,L140,L200,M210

Background Risk and Investors¡¯ Participation in Risky Financial Assets

He Xingqiang, Shi Wei and Zhou Kaiguo

(Lingnan College, Sun Yatª²sen University)

Abstract:Utilizing an individual investor survey in 9 cities in China in 2006, this paper studies the effect of labor income risk on investors¡¯ participation in risky financial assets for the first time, and explores the effects of background risks and a range of other factors extensively. Results obtained include that labor income risk, business investment, and real estate investment reduce investors¡¯ participation in risky financial assets. Health status exerts insignificant effect, whereas medical social security or commercial health insurance promotes investors¡¯ participation. Risk aversion is statistically insignificant. Our findings provide some policy implications.

Key Words:Background Risk; Labor Income Risk; Health Status; Risky Financial Assets

JEL Classification:D8£¬G11£¬Z13

Prosocial Behaviors and the Decomposition of Social Preferences

Chen Yefeng

(School of Economics£¬Zhejiang University)

Abstract£ºEmploying a within-subjects design,in this paper we run a two-person anonymous and absolutely strange matching quaternate experiments with suvery questions.We found there are widely exsited with four kinds of classic prosocial behaviors and we also detected a significant relations between these different kinds of prosocial behaviors in different games. Meanwhile we decomposed and tested the social preferences behind the trust and trustworthiness actions in the trust game and the cooperation actions in the public goods game.We found that the variance in trust actions is accounted for by expectation of trustworthiness but not altruism,while variance in trustworthiness actions is mainly accounted for by altruism with a comparatively small role of reciprocity.And the pattern of cooperation behavior in public goods game is consistent with inequality aversion.

Key Words£º Prosocial Behavior; Social Preferences; Experimental Economics; Public Goods Game; Trust Game; Dictator Game

JEL Classification£ºC72, C92, C81, D71

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