This document presents a theoretical model analyzing the optimal regulatory regime for state-owned enterprises (SOEs) in a transition economy like China. It discusses two types of regulatory regimes: an integrated regime with fewer regulators and concentrated power, and a separated regime with more regulators and dispersed power. The model examines how the choice of regulatory regime, level of competition faced by SOEs, and potential for collusion between regulators and SOEs impact the state's objectives. It hypothesizes that a separated regime reduces collusion but also regulatory effort, while an integrated regime increases effort but also risk of collusion, with higher competition favoring an integrated regime by discouraging collusion.

1. Optimal Regulatory Regime and Competition: a Theoretical Model and a Case Study of Chinese SOEs (Part I: Theory)
Zhen Qi
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2. Theoretical Question
•What is the optimal regulatory regime for state owned enterprises (SOEs) in a transition economy like China?
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3. Integrated Regime vs. Separated Regime
•Integrated regime:
fewer regulators
higher degree of concentration of regulatory power.
•Separated regime:
more regulators
lower degree of concentration of regulatory power.
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4. SOEs in a Transition Economy
•Like in planning economy, SOEs are tightly controlled by regulators.
Regulators scrutinise SOEs’ investment proposals, select and appoint SOEs managers, inspect SOEs’ productivity and so on.
•Like in market economy, SOEs face competition from non-SOEs and other SOEs.
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5. Chinese SOEs’ Regulators Since the Reform and Opening-up
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Background

6. Case Study Questions
Question 1: What institutional logic lies behind changes in Chinese SOEs’ regulatory regime corresponding to the market-oriented reform?
Question 2: What influence do regulatory regime changes exert on the relationship between SOEs and regulators ?
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7. Three-tier Hierarchy Model of Projects Screening
•Principle: state
•Regulator(s):
two regulators in separated regime or one regulator in integrated regime
•Regulated firms: SOEs
•Task: state delegates regulator(s) to screen projects proposed by SOEs.
Theoretical Setting Up
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8. Game Timing
1. Principle chooses regulatory regime.
2. Regulator(s) spend “effort” to screen SOEs’ projects proposals.
3. Regulator(s) report to the principle. If the project is reported as “good” then it is launched, otherwise it is rejected.
4. Projects reported as “good” are approved and all players are paid.
Theoretical Mechanism
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9. Agency Problem
•SOEs managers benefit from expanding enterprises’ scale even though some projects are “bad”.
•Regulator(s) can share this benefit with SOEs by reporting “bad” projects as “good”.
•The state would suffer loss from SOEs and regulators’ collusion which leads to bad projects’ launching.
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Theoretical Mechanism

10. State’s Problem
1.By rewarding regulator(s) according to the regulatory results, state tries to induce regulators’ more effort.
2.Doing collusion-proof against regulator(s) and SOEs.
Theoretical Mechanism
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11. Regulators’ Problem
Theoretical Mechanism
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•Maximising utility when marginal cost of effort spending equals to marginal benefit.
•Benefit here come from
(1) state’s reward when a good project is launched;
(2) collusion benefit from SOEs when a bad project is launched.

12. Basic Logic : Separated Regime
•Free riding among regulators may lead to less effort. Because regulation is a team work, so the state cannot distinguish each regulator’s contribution and reward accordingly.
•In separated regime, the regulators check and balance each other. This check and balance mechanism reduce regulators’ benefit from collusion and discourage their collusion with SOEs.
Theoretical Mechanism
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13. Basic Logic : Integrated Regime
•In integrated regime, state can reward the only regulator accordingly, thus the free riding problem can be solved and the regulator would spend more effort.
•However, the solo regulator can easily collude with SOEs for lack of check and balance mechanism.
Theoretical Mechanism
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14. Basic Logic : Trade-off
•In integrated regime, state will benefit from regulator’s more effort, however he will also suffer more loss from collusion.
•In separated regime, state suffers less from collusion, but can only induce regulators’ less effort.
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Theoretical Mechanism

15. Basic Logic : Competition
•Competition can reduce the benefit of collusion, furthermore discourage regulators’ collusion incentive. So, as the degree of competition increases, the state can benefit more from switching separated regime to integrated one.
•It can explain a stylised fact that: as China’s market- oriented reform which enhanced the degree of market competitiveness was introduced, SOEs’ regulatory regime switched from separated to integrated.
Theoretical Mechanism
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16. SOEs in Different Markets
•Local SOEs are mainly operated in competitive market.
•Central SOEs are mainly operated in monopolised market.
Case Study
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17. Mismatch
•The mismatch between integrated regulatory regime and monopolised central SOEs may lead to:
(1) more collusion (corruption);
(2) less efficiency than local SOEs.
Case Study Hypotheses
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18. Thank you very much.
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