Overcapacity has become a major obstacle to
the healthy development of China’s economy in
recent years. Using a mixed oligopoly competition model, this paper studies how the government soft budget
constraint and strategic delegation for State-Owned Enterprise (SOE)
impact the capacity choice of SOE and
private enterprise. Theoretical analysis shows that: 1) Generally, SOE tends to have excess capacity, while private enterprise tends to have undercapacity;
2) The government soft budget constraint and
strategic delegation to SOE will not only aggravate the overcapacity of SOE, but the undercapacity of private enterprise. Based on the theoretical analysis, this
paper puts forward policy recommendations on the issue of overcapacity
for some industrial sectors in China.
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