Technology accessibility and the local government's incentive to aid zombie firms in China

Abstract

We develop an open-city model in which the incentive for a local government to shut down zombie firms depends on the capacity of the most efficient firms in the city to re-employ the displaced workers in competition with the efficient firms in other cities. The model predicts that the local government has a greater incentive to shut down zombie firms when the city has better access to technology that enables the efficient firms to expand and re-employ displaced workers. Data from Chinese cities validate the prediction. Our developed model adds to the understandings of governments' roles in China's zombie firm problems and provides a more feasible solution for reducing zombie firms.