Efficiency and the response to reform in Chinese urban construction enterprises: A production theory approach

This research examines the degree to which the Chinese urban construction industry is characterized by systematic inefficiencies, and whether or not economic reforms begun in the mid-1980s have led to gradual improvements in the technical and price efficiency of production. Two different methods from the microeconomic theory of production are used, a production function approach that assumes output maximization but assumes unobserved inputs, and a generalized cost function approach that assumes shadow prices deviate systematically from observed prices. Two separate datasets are examined, one of individual state-owned enterprises, another of provincial-level aggregates for both state-owned and urban collective enterprises. This research, in contrast to the literature examining the impact of reform on Chinese industry, uses flexible functional forms and a variety of approaches to estimate measures of efficiency. A Generalized McFadden functional form is used to allow for both flexibility and proper curvature, though other forms are also considered and tested. Efficiency measures are tested for consistent and statistically significant responses to reform. This research examines the dispersion of inefficiency as well as the overall trend. This approach is consistent with a utility maximization model that explains production inefficiency as being caused by the presence of motives other than profit maximization, an approach which presumes that economic reform works primarily by changing the relative weight of the decision maker's objectives. Results indicate that, in spite of central government complaints that urban enterprises were overstaffed, labor's marginal product exceeded its wage, in general, for the Chinese urban construction sector. Capital's marginal product was generally low, as suggested by the investment hunger hypothesis. State-owned enterprises were more price-efficient in the coastal provinces than in the interior, and less technically and price efficient than urban collective enterprises. Implementation of a competitive bidding reform had inconsistent effects, if any, in improving technical and price efficiency in the Chinese urban construction sector, while the passing of time during the mid to late 1980s led to some improvements in technical efficiency and a decrease in the overuse of labor. Finally, in a rebuttal of the argument that the profit motive has increased relative to other motives of the decision-makers, there was no consistent evidence of a decrease in the dispersion of inefficiency.