How much value has been lost in the Chinese bankruptcy system due to excessive liquidation of companies whose going concern value is greater than the liquidation value? I compile new judiciary bankruptcy auction data covering all bankruptcy asset sales from 2017 to 2022 in China. I estimate the valuation of the asset for both the final buyer and creditor through the revealed preference method using an auction model. On average, excessive liquidation results in a 13.5% welfare loss. However, solely considering the liquidation process, an 8% welfare gain is derived from selling the asset without transferring it to the creditors. Firms that are (1) larger in total asset size, (2) have less information disclosure, (3) have less access to the financial market, and (4) possess a higher fraction of intangible assets are more vulnerable to such welfare loss. Overall, this paper suggests that policies promoting bankruptcy reorganization by introducing distressed investors who target larger bankruptcy firms suffering more from information asymmetry will significantly enhance welfare in the Chinese bankruptcy market.

A significant number of procurements in both public and private sectors have adopted the practice of splitting the award among multiple bidders in an auction, as an alternative to the one-winner-take-all approach. This aims to encourage participation from small firms and reduce dependency on a single supplier. One prominent example is China’s national drug procurement multiple-winner auction, where the drug supply is divided among several winners, increasing in proportion to the number of participants. Given the societal importance of drug prices, it is crucial to properly examine the rationale for using split-award auctions. However, there is limited theoretical and empirical guidance available in the literature. This paper investigates the competitive impact of split-award auctions on key outcomes, such as participation and procurement costs, using both a theoretical framework and empirical evidence. Theoretically, it demonstrates that split-award auctions consistently boost participation but also increase expected procurement costs in almost all instances. The expected procurement cost decreases only if the split-award auction raises participation from 0 to 1 compared to the winner-take-all auction. Empirically, the paper estimates the direction and magnitude of the effects on participation and expected procurement costs using drug procurement data. The findings reveal that split-award auctions moderately increase average participation by 0.85 bidders (17%), but significantly raise the unit expected procurement cost by 4 CNY (38%). Almost half of the overall increase in expected procurement costs stems from reallocating production to more expensive bidders, while the other half results from increased markups charged by bidders in response to this reallocation.

We provide firm-level evidence on the real effects of shadow banking in terms of technological innovation. Firm-to-firm entrusted loans, the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints, information asymmetry, and takeover exposures. A plausible underlying channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper suggests that shadow banking helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy.

Using a proprietary bank-loan-level dataset, we find a surprising negative relation between loan spreads and minimum wage. We propose a stylized model to explain the relation: banks filter out the low-quality borrowers after the wage shocks, resulting in a separating equilibrium. Our evidence is consistent with the model’s predictions: (1) city-level and firm-level evidence shows that an increase in minimum wage is negatively associated with the likelihood of obtaining bank loans, especially for labor-intensive borrowers, (2) deal-level evidence shows that both the average default rate and loan spreads decrease when minimum wage rises, and (3) subsequently, labor intensive firms that are still able to obtain bank loans when minimum wage rises outperform their peers. Our findings suggest that as more credit resources are allocated to better quality firms and leave other firms far more behind, the existence of such credit reallocation effects can exacerbate the divergence between higher and lower quality firms induced by an increase in minimum wages.

Recessions are associated with sharp increases in turbulence that reshuffle firms’productivity rankings. To study the business cycle implications of turbulence shocks, we use Compustat data to construct a measure of turbulence based on the (inverse of) Spearman correlations of firms' productivity rankings between adjacent years. We document evidence that turbulence rises in recessions, reallocating labor and capital from high- to low-productivity firms and reducing aggregate TFP and the stock market value of firms. A real business cycle model with heterogeneous ffrms and ffnancial frictions can generate the observed macroeconomic and reallocation effects of turbulence. In the model, increased turbulence makes high-productivity ffrms less likely to remain productive, reducing their expected equity values and tightening their borrowing constraints relative to low-productivity firms. This leads to a reallocation that reduces aggregate TFP. Unlike uncertainty, turbulence changes both the conditional mean and the conditional variance of the firm productivity distribution, enabling a turbulence shock to generate a recession with synchronized declines in aggregate activities.

Using a new case-level dataset we document a set of stylized facts on bankruptcy in China and study how the staggered introduction of specialized courts across Chi- nese cities affected insolvency resolution and the local economy. For identification, we compare bankruptcy cases handled by specialized versus traditional civil courts within the same city and filed in the same year. We find that specialized courts decrease case duration by 36% relative to traditional civil courts. We provide evi- dence consistent with court specialization increasing efficiency via selection of better trained judges and higher judicial independence from local politicians. We docu- ment that cities introducing specialized courts experience a relative reallocation of employment out of zombie firms-intensive sectors, as well as faster firm entry and a larger increase in average capital productivity.

Developing countries are characterized by frictions that impede the mobility of workers across occupations and space. We disentangle the role of insecure property rights from other labor mobility frictions for the reallocation of labor from agriculture to non-agriculture and from rural to urban areas. We combine rich household and individual-level panel data from China and an equilibrium quantitative framework that features the sorting of workers across locations and occupations. We explicitly model the farming household and the endogenous decisions of who operates the family farm and who potentially migrates, capturing an additional channel of selection within the household. We find that land insecurity has substantial negative effects on agricultural productivity and structural change, raising the share of households operating farms by almost 30 percentage points and depressing agricultural productivity by more than 10 percent. Quantitatively, land insecurity is as important as all other labor mobility frictions. We measure a sharp reduction in overall labor mobility barriers over 2004-2018 in the Chinese economy, all of which can be accounted for by improved land security, consistent with reforms covering rural land in China during the period.

We provide firm-level evidence on the real effects of shadow banking in terms of technological innovation. Firm-to-firm entrusted loans, the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints, information asymmetry, and takeover exposures. A plausible underlying channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper suggests shadow banking helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy

We study credit allocation across  rms and its real e ects during China's economic stimulus plan of 2009-2010. We match con dential loan-level data from the 19 largest Chinese banks with  rm-level data on manufacturing  rms. We document that the stimulus-driven credit expansion disproportionately favored state-owned rms and  rms with lower average product of capital, reversing the process of capital reallocation towards private  rms that characterized China's high growth before 2008. We argue that implicit government guarantees for state-connected  rms become more prominent during recessions and can explain this reversal.

Based on a DSGE model embedded with a stock market, we inspect interconnection between China's financial markets and macroeconomic cycles. We find consumption, investment and capacity utilization display significant and positive responses to stock market booms triggered by financial and confidence shocks, however, inflation responds insignificantly. We perceive a counteractive and significant reaction of China's monetary policy rule to credit-to-GDP gap at business cycle frequency. We decompose stock price into fundamental value influenced by the financial shock and speculative bubble driven by the confidence shock, and the confidence shock's contribution to stock price fluctuations is estimated to be about 14.8%. Model validation based on the DSGE-VAR framework indicates no serious structural model misspecification.