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Authors:

• David LI
  HK University of Science and Technology

• Tao LI
  HK University of Science and Technology

• Francis T. LUI
  HK University of Science and Technology

• Hongling WANG

Why do governments private or liquidate, i.e., dump, state-owned enterprises (SOEs)? Existing research on privatization has not paid much attention to this question. The paper focuses on testing two alternative theories of the issue. One theory explains that governments privatize or liquidate SOEs in order to enhance production efficiency. The other theory explains that increasing government revenue or stopping subsidies to profit-losing SOEs is the motivation. Our tests based on a data set from China reject the efficiency theory and yield support for the revenue theory. In addition, we find evidence that the concerns about unemployment are important obstacles of privatization or liquidation decisions. A simple implication is that it might be sensible to propose second-best privatization or liquidation programs that take government objectives into account and are feasible with the government rather than first-best programs that will never be implemented.