By Derong Chen (auth.)
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Additional info for Chinese Firms between Hierarchy and Market: The Contract Management Responsibility System in China
Therefore, the study of the state-owned enterprise is desirable in focusing on these two types of company. Among the four chosen companies, three are medium-sized and one large-sized, corresponding to the distribution of a higher proportion of enterprises of medium size and of a lower proportion of large size in the industry (see chapter 4 ). The impact of size has to be taken into account because of its association with decision-making in a hierarchical system. But economic scale is closely linked to technology, and most largesized enterprises are in heavy industry.
Two types of cost occur in contracting. These are conventional production costs as well as the costs associated with the capture of wealth. The latter occurs because either (a) measuring each parties' contribution to output is necessary, but costly, or (b) it is impossible to predict all the variability in output. It creates the public domain or so-called common property. Each party spends resources to capture this wealth. Different contracts encounter different incentive problems, which lead to various unexpected behaviours, such as shirking, free riding, and adverse selecting.
Cheung, 1974). Barzel used the public domain as the key concept to illustrate the similar feature of property rights and its operational consequence (Barzel, 1989). ' 'The public domain is ubiquitous; innumerable commodity attributes are placed in it'. For example, 'any service not fully charged for on the margin is at least partly relinquished to the public domain' (Barzel, 1989). The public domain is a pertinent idea when rights cannot be delineated because it is either too costly or too difficult for them to be known, though such rights still exist and can always be exploited.