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Authors:

• Dapeng CAI
  Nagoya University

• Jie LI
  Sun Yat-Sen University

We develop a common agency model in which a state-owned enterprise (SOE) and a private firm make contributions to influence the government’s decision on an implicit subsidy to the SOE. We find that the government’s optimal choice depends primarily on the efficiency discrepancy between the firms. The government favors the SOE less (more) when it is relatively efficient (inefficient), which improves (reduces) social welfare. The extent to which the SOE is favored is determined by the government’s controlling power over the SOE.