Causes Of Local Governments "Docking Central SOE" Fever

In this paper,"Docking central SOE" means that local governments attract central SOE to restructure or acquire high-quality local SOEs of their own. We add two new players-"central government" and " central SOE " into local governments competition model(known as "federalism" paradigm)and set up the "game model of three bodies" to study the interaction between central government, local governments and central SOE in the background of fiscal decentralization and financial centralization. We try to provide some theoretical explanations for local governments "docking central SOE " fever after 2008 and detect their impact on local resource allocation."Fiscal decentralization" means that the local governments have certain rights on taxes and can decide budget allocation on their own. Local governments allocate budget revenues on infrastructure investment, local social security investment and local SOE investment in order to maximize their own utility. "fiscal decentralization" also means that the local government will compete with their counterparts for foreign capital and private capital through the way of infrastructure investment;"Financial centralization" means that the state-owned banking system is relatively independent of the local governments, and local governments can't get desired amount of financial resources from local state-owned banks,so they have to make use of other means such as "local financing platform company" to collect financial resources and try to relax their budget constraints. "Central Financial centralization" also means the central government can effectively limit the financing ability of local governments, thus tightening the level of local budgets.In the context of "fiscal decentralization" and "financial centralization", we have reached the following significant conclusions through our model:1, the local governments'competition leads to "resource allocation distortion "--in comparison with non-competition circumstance, infrastructure investment is too high, but the level of local social security is too low.2, Causes of local governments "Docking central SOE "fever after 2008 can be summed up as "local financial tightening" and "central financial commitments". In the context of the financial centralization, on the one hand, local government finance is constrained by the central government due to the their excessively accumulated risks, thus resulting in local budgets tightening which leads to the increase of the opportunity cost of investing local SOEs on their own. When the opportunity cost exceeds the "private benefits of control", local governments will change their attitude and will be willing to dock central SOE. We define this cause as "local financial tightening"; on the other hand, central SOEs are financially supported by the central government, and "Docking central SOE "help local governments get an indirect access to the huge financial resources behind central SOEs. The greater the expected funds, the greater the willingness of local governments to sell local SOEs. We define this cause as "central financial commitments." Whether it is "local financial tightening" or "central financial commitments", they can both be understood as central government's strategy in the central-local government game. Under certain conditions this game can reach a Nash equilibrium in which local governments will choose to dock central SOEs.3,There is also a game between the central SOE and the central government. Risks(this article concerns mainly the inflation risk)caused by the central SOEs are not assumed by themselves but by the central government, so the number of local SOEs the central government allows the central SOE to merge is less than the central SOE intend to merge. In this game, the central SOE chooses ratio of Central SOE Bonus (the profit the central SOE turns over to the central government) and central government chooses the amount of financial support. When they reach Nash equilibrium, both of them have reached maximum utility, and the number of local SOEs that the central SOE merges is the maximum number it is allowed to merge by the central government.4, Because the central government restricts the number the central SOE is allowed to merge, when " Docking central SOE " is conducive to local governments, the central SOEs become scarce resources which local governments will compete for. Local governments primarily offer favorable tax to attract central enterprises, and the competition results in further resource allocation distortion, including infrastructure investment decline, social security investment decline and the whole social welfare levels decline.5, "Turning Central SOE Bonus to bridge social security gap" can be carried out either in the "discretionary" approach or in the "non-discretionary" approach. We have proved that in the "discretionary" approach, resource allocation distortion is intensified, including further increase in infrastructure investment, further decline in local government social security investment and the total decline in social security level even plus the transferred Central SOE Bonus; in the "non-discretionary" approach, "resource allocation distortion" is to some degree corrected. Although local infrastructure investment still increases and local government social security investment still declines, the total social security level increases if the transferred Central SOE Bonus is added. So for the purpose of bridging the social security gap, the "non-discretionary" approach is superior to "discretionary" approach.