Property Rights, Expropriations, and Business Cycles in China

Abstract Real business cycles in China are different than in many other countries, including consumption being more volatile than output and uncorrelated with investment. To study whether Chinese institutions can account for these features, we augment the standard real business cycle model by private and state-owned enterprises facing time-to-build constraints, expropriations, and government expenditures. We introduce shocks to each of these activities and estimate our model with Bayesian techniques. The model matches the salient data moments quite closely, with expropriations playing a central role. In particular, shocks to expropriations account for over 70% of consumption and output volatility, and over 60% of private investment volatility. To assess whether our estimated expropriations are empirically plausible, we show that: (i) the model-generated expropriation series is positively correlated with a commonly used measure of property rights; (ii) the explanatory power of expropriations drops considerably after 2012, coinciding with the government’s anti-corruption campaign; and (iii) a placebo test estimating the model for the U.S. finds expropriations to be about one eighth of those in China, and to account for only a small share of the U.S. aggregate fluctuations.