Government–Firm Collusion: A New Analytical Framework

This chapter is to explain the China Model characterized with “high economic growth rate concomitant with high frequency of vicious accidents” by constructing a formal model of the local government–firm collusion. Section 2.1 introduces three famous or infamous events about PX (p-Xylene) projects in China and raises two questions relevant to these events. Section 2.2 makes a literature review of theoretical interpretations of the China Model and elicits the argument of the whole chapter. Section 2.3 defines the basic elements of the model of the local government–firm collusion. Section 2.4 discusses optimal equilibrium collusion contract and optimal prevention collusion contract and testifies to major propositions of this chapter. Section 2.5 provides an interpretation of different results of the three PX projects mentioned above. Section 2.6 discusses other factors that might have an impact on collusion. Section 2.7 is a summary of the chapter.