The Mandarin Model of Growth
China's economic reforms over the past 40 years have led to a mixed economic structure with the government playing a key role in an increasingly market-driven economy. This paper expands a standard growth model of Barro (1990) to incorporate this structure, with a particular focus on including the agency problem between the central and local governments. To incentivize local governors, the central government has established an economic tournament, which generates not only intended incentives to develop local economies, à la Holmstrolm (1982), but also short-termist behaviors, à la Stein (1989). The latter channel helps to explain a series of challenges that confront the Chinese economy, such as overleverage through shadow banking and unreliable economic statistics.
I am grateful to Jianjun Miao, Yingyi Qian, and seminar participants at the 2018 Hong Kong-Shenzhen Summer Finance Conference, the 2018 NBER Chinese Economy Meeting, Princeton, SWUFE and UIBE for helpful discussions and comments, to Lunyang Huang and Chang Liu for able research assistance, and in particular to Zheng Song for highly constructive suggestions. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.