Recently, the paper Allocative implications of government investment in private sector, co-authored by Associate Professor Zhang Jingyi from the Macroeconomics Department of the School of Economics, Shanghai University of Finance and Economics, and her doctoral student Lian Lili, has been published online in Journal of Development Economics, a top-tier international economics journal.
Abstract
In China, state owners make minority equity investments in private firms. We study the allocative implications of such government investments using a two-sector DSGE model with financial friction and idiosyncratic productivities. In our model, private owners are more productive than state owners but face tighter financial constraints. Equity investment by a state owner alleviates the private owner’s financial constraint but dampens its own productivity, consistent with Chinese firm-level data. Under this setup, only private owners with sufficiently high productivity accept such investment, while only state owners with sufficiently low productivity make such investment. As a result, expansion of such government investment improves capital allocation within each sector and across sectors. Our analysis shows that financial liberalizations, including liberalizing interest-rate controls and reducing the loan-to-value gap between sectors, stimulate private owners’ demand for such government investment but discourage state owners from making it, thus generating an ambiguous effect on aggregate productivity.
About the Authors
Zhang Jingyi is an Associate Professor at the Macroeconomics Department of the School of Economics, Shanghai University of Finance and Economics. She has published multiple papers in leading international journals including Journal of Monetary Economics, Journal of International Economics, Journal of Development Economics, and Review of Economic Dynamics. She has presided over the Youth Project and General Project of the National Natural Science Foundation of China, as well as a thematic research project of the Hong Kong Institute for Monetary and Financial Research.
Lian Lili is a doctoral student majoring in Western Economics (admitted in 2019) at the School of Economics, Shanghai University of Finance and Economics, supervised by Associate Professor Zhang Jingyi. She is currently a postdoctoral researcher at Peking University HSBC Business School. Her main research fields include macroeconomics, monetary policy and financial frictions. Her research papers have appeared in journals such as Journal of Development Economics and Journal of Financial Research.
