Kwok Chun, Wong and Linzi, Zheng University of Hong Kong

1. Sale of Public Housings to Sitting-Tenants: What Determines the Success or Failure of Such Privatization Programs around the World since 1980's ? Kwok Chun, Wong and Linzi, Zheng University of Hong Kong

2. Focus of this presentation • Drawing a general pattern of public housing production proceeds for different countries can by examining Chinese indemnificatory housing construction, try to explain why the outcomes of this program have not been close to satisfactory every since 1994.

3. Introduction • Comparisons and analysis of indemnificatory housing agents and responsibilities in different countries • Hypothesis of China’s failure and other countries’ successes • Model construction within principal—agent theory • Empirical Evidences

4. Comparisons and analysis Table 1 indemnificatory housing provider and their responsibilities

5. Comparisons and analysis • In Japan and Singapore, central governments, local housing management departments and construction agencies are participants of policy making • central governments are premier whose responsibility is coordination of related resources • local housing management and construction departments are policy implementers whose responsibilities are clearly regulated by policy • The local governments do not have rights to implementation like China does

6. Comparisons and analysis • In China, a series of indemnificatory policies have been enacted out ever since 1994 • local governments are they actors of indemnificatory housing program • However, there are no specific codes to regulate local government’s relative behaviors • Local governments have incentives to act tangentially to central government’s objectives.

7. Hypothesis • relative successes of countries like Japan and Singapore is because of their adoption of principals and agents and the information transportation chain between them • central governments and local governments actually act as principal and agents constraint by contract and local governments can achieve their maximum utility by providing minimum units of indemnificatory housing.

8. Model construction—Assumptions • local governments have enough information advantage to make the central government lack of real information because the transportation chain is too long • the central government wants to maximize social welfare as a whole while local governments aim to achieve GDP growth rate as high as possible • central government is risk neutrality for the enactments are implemented within the whole country while local governments are risk aversion when certainty equivalents and risk premium should be considered.

9. Model construction • a • y means production, and y = a+ is the production function of local governments • W（y） = s + by , • y = y – W denotes income of central government • The problem the central government is facing is to maximize W and rewards and punishments according to observable y

10. Model construction • Risk aversion of local governments, • local governments are C( a), • let C（a）= / 2 , k > 0 means cost coefficient • Therefore, the real income of local governments are:

11. Model construction • let X equals to the stable income of local governments and Y is random income, if u (X ) = Eu ( Y), we call X is Y’s certainty equivalence, so we know the certainty equivalence of local governments is：

12. Model construction • It is easy to prove that and because that there is , we get: • Let means the reserve income level of local governments. Thus the constraint of local governments’ participation of this program is:

13. Model construction • The agent decision is: • The incentive consistent condition is • According to the given contract function, W (y)= s + by, the principal decision is：

14. Model construction • by solving these equations we can get the optimal incentive coefficient of central government is: • Substituteintowe can get the optimal effort degree is:

15. Process of calculation Measurement of explicit cost • The Explicit Cost, includes land grant fee, housing preferential favorable fee and construction cost of infrastructure. • Opportunity Cost. The potential decrement of GDP caused by reducing investments in fixed assets.

16. Process of calculation • land grant fee is the payment to land which should be repaid by the seller when owner wants to resell one’s economic apartment five years after buying which is about 10% of the final price of this Table 2 land grant fee of Beijing

17. Process of calculation Table 3 housing preferential favorable fee

18. Process of calculation Table4 Total explicit cost of economic housing each year in Beijing

19. Process of calculation Measurement of opportunity cost • Let GDP = a + b* fixed assets investment

20. Process of calculation • Let GDP = a + b* fixed assets investment

21. Process of calculation Table 6 opportunity cost measured by GDP

22. Incentive level analysis Table 7 the proportion of cost distribution

23. Risk aversion degree analysis of local governments According to results of the former two parts we can get conclusions twofold: One is the cost of efforts of local governments in China is very high and the incentive level offered by central government is low, therefore the risk aversion degree of local governments is very high.

24. Empirical Evidence Assumptions 1）because of the impossible and very expensive monitoring cost of local governments, the central government choose to be accept the core role of local governments within the utility function. 2）GDP and indemnificatory housing have negative relationship.

25. Empirical Evidence Utility function of central government where H is the amount of indemnificatory housing. Suppose central government has the minimum requirement of local indemnificatory housing production according to we get where satisfies

26. Empirical Evidence utility function of local government Obviously so the first item of eq(*) is positive and the second one is negative. When it is decreasing function, within the principal agent relationship, local governments are inclined to keep H above the stable value.

27. Empirical Evidence utility function of local government Build a lagrange function： Has to satisfy

28. Empirical Evidence utility function of local government In eq(**), because , From eq(*)we know therefore we get H =min H, which means only the minimum amount of indemnificatory housing provided by local governments can satisfy the requirements of utility maximization.

29. Empirical Evidence Table 8 middle and low income groups in Beijing

30. Empirical Evidence Indemnificatory housing demand and level in Beijing

31. Empirical Evidence • All the indemnificatory levels are lower than ten percent which is obviously not sufficient. However, during this period the GDP growth rate in Beijing has been kept on 10% --it is good performance of economy. The GDP growth rate is stable which means construction the indemnificatory housing construction did not encroach on economy so we can conclude that the minH of Beijing is some figure between 20 thousand to 30 thousand which is consist to the reality—according the publicized political goal.

32. Conclusion In China, the process of indemnificatory housing production is actually a contract between central government and local governments, the two of which comprise an relationship of principal and agent. Because of the extremely high or even impossible monitoring cost and asymmetry information, the utility functions of local governments get the maximum point when they provide minimum amount of indemnificatory housing.