Principal Agent Theory and Private Property Rights in China's Economic Reform

As a contribution to the wider institutional analysis of China's enterprise reform, this paper analyzed three interrelated problems in the literature.It argued that principal-agent theory was not suitable for analysis of China's public enterprises, notably state-owned enterprises, as by definition, it requires a decision-making principal and clearly defined property rights.Actual problems of the theory's application included the enigmatic identity of the principals and the inability of deducing refutable hypotheses.One primary reason for the divergent views on the identity of principals was the widespread misconceptions on the private property rights.This misconception further led to divergent views on the nature of another important actor in China's economy, the township and village enterprises.It is hoped that clarification of these three concepts would facilitate further and better understanding of the transition economy in China.