Effects of China’s Administrative Approval Reforms on Transaction Cost and Economic Growth

Xia Jiechang (夏杰长) and Liu Cheng (刘诚)
National Academy of Economic Strategy, Chinese Academy of Social Sciences (CASS)
Abstract: Chinas economic growth miracle despite complicated administrative
approval formalities prompted us to raise the following question: Is it true that reforming
administrative approval will promote economic growth? Based on our analysis on market
entry, we discovered that reforming administrative approval will spur economic growth by
reducing transaction cost for firms. Administrative approval may suppress social cost and
propel Chinas economic growth; Chinas gradualist approval reforms may indeed propel
economic growth by reducing transaction cost for firms. With the data of prefecture-level
cities during 2000-2013 and data of companies listed on the SME board during 2010-2014,
we tested the effects of approval reforms on economic growth and on transaction cost, and
employed instrumental variable and PSMfor the treatment of the endogeneity problem- all
these tests led to robust and consistent results. Moreover, we discovered that difference in
government policy implementation in the approval process is the root cause of corruption
and rent seeking.
Keywords: reform of administrative approval, economic growth, transaction cost, social
cost
JEL Classification: 011, P21

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