Agency in Inefficient Bureaucracies: Evidence from Chinese Ownership Reform

The 2005 firm ownership reform in China required a contract renegotiation between controlling and minority shareholders. Minority shareholders in state-controlled firms achieved more favorable reform outcomes than minority share-holders in privately-controlled firms in cities where informal payments to government officials are relatively high. Reform outcomes were also correlated with bureaucratic managers-private financial incentives in these cities. Higher-paid bureaucrats achieved better outcomes for their state employers at the expense of minority shareholders. The results suggest that individual agency is more prevalent in low-quality bureaucracies and that agency can limit a government's ability to use unilateral power to expropriate private citizens.