CONTROL IN A DYNAMIC VILLAGE ECONOMY - THE REFORMS AND UNBALANCED DEVELOPMENT IN CHINA RURAL ECONOMY

A dynamic control framework is used to model the Chinese village economy in order to explain the rural sector's unbalanced growth in the post reform period. Village leaders are assumed to maximize a multi-attribute utility function by manipulating local policy instruments subject to the structural relationships in the economy. The model's parameters are estimated econometrically using a data set from forty villages in eastern China. The empirical results identify important linkages between agriculture and rural industry in village economies. Unbalanced growth can partially be explained by the way economic incentives induce individuals in rural areas to move resources toward the rural industrial sector and away from agriculture.