Bankruptcy, sale, and mergers as a route to the reform of Chinese SOEs

This paper uses a Cournot competition model to show that the welfare consequences of different reforms are determined by the industrial structure, the distribution of production capacities, and the cost differentials among firms. As these factors vary from industry to industry, decisions on reform of loss-making state-owned enterprises (SOEs), including choices between mergers and sale, to whom the SOEs' assets should be sold as well as the auction approach should be endogenized within the industrial structure. This paper also shows that development of institutions, including financial markets, second-hand asset markets, and specialized intermediaries will help to generate higher welfare gains from SOE reforms.