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Essays on finance and growth in China He, Qichun

Abstract

This dissertation contributes to the finance-growth literature theoretically and empirically. The first chapter investigates whether financial deregulation causes economic growth and whether the effect happens through changes in the allocation of credit across sectors or changes in the savings an investment rate. This chapter uses the province-level financial deregulation experience of China from 1981 to 1998 to study these questions. It addresses issues of endogeneity of the growth channels by instrumenting with a series of financial reform policies. It finds that financial deregulation causes economic growth, and the effect is largely through the reallocation of credit across sectors rather than changes in savings and investment rates. The second chapter studies the 'capital-lord-entrepreneur' problem in an endogenous growth model. There are two representative agents--a household (the capital lord) financing R&D and an entrepreneur-inventor performing R&D. How do the contractual provisions on how households and entrepreneurs share property rights on inventions when asymmetric information exists affect growth? The credit contract giving entrepreneurs a higher share of monopolistic profit from inventions (i.e. entrepreneur's inventive incentive (EII) ) elicits more entrepreneurs' effort, generating a "bigger cake", but it also decreases the share of households, resulting in a "household's dissaving" effect. To ensure bounded growth, entrepreneur's effort increases as her share increases but at a decreasing rate, so the "bigger cake" effect is decreasing. The "household's dissaving" effect is increasing because the one additional share of cake given by households is bigger given effort is increasing. At the beginning, the "bigger cake" effect dominates, but beyond a point, "household's dissaving" effect dominates. Therefore the balanced growth rate is an inverted-U function of EII. Whether agricultural resource abundance is a blessing for industrialization is an issue that generates controversy in the development literature and has not been well addressed in the resource-curse literature. Attempting to address this issue, I examine the effect of long-term yearly average rainfall, average and variance of temperature, and sunshine on quality-adjusted farmland per capita and economic growth in China from 1981 to 1998. I find initial quality-adjusted farmland per capita as instrumented by weather indicators has a significantly negative impact on subsequent growth rate, so farmland abundance is a curse for growth. This negative relationship holds true even after controlling for traditional growth factors, population density (i.e. total land per capita), and time effects. Moreover, the weather indicators affect growth only through the channel of initial quality-adjusted farmland per capita, while initial quality-adjusted farmland per capita lowers growth rates mainly through the channel of total factor productivity.

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