Understanding the Tendency of over Capital-Intensiveness of Mega-SOEs in China – A Theoretical Approach

This paper establishes a theory for the over-capital intensiveness of mega-SOEs in China. It demonstrates in a theoretical model that the factor endowment structure implied by the Nash equilibrium points under a Market Leninist Economy is more capital-intensive implied by the factor endowment structure implied by the Pareto-optimum point under a welfare-maximizing economy. Since there is tendency for mega-SOEs in China to trap into the Nash equilibrium point, so the further incentives for these mega-SOEs to reconvert to their optimal factor endowment structure vanishes. Two effects are responsible for the Nash equilibrium of SOEs. One is the urge of ‘business empire-building’ from SOE managers. The other is the ‘state legitimacy-seeking’ from Beijing.