THE NATURE OF THE TOWNSHIP VILLAGE ENTERPRISE

The township-village enterprise (TVE) in China is owned by local citizens and controlled by the township-village government (TVG). The TVE's residual benefits are shared among citizens and TVG officials. This ownership structure can be viewed as the solution to the central government's problem of improving citizen's welfare subject to the constraints that the current political system be preserved and that local agents be provided with incentives. The control right is given to the TVG because ordinary citizens cannot provide security and access to resources that are critical for the success of the TVE. Nominal ownership is given to the citizens to guarantee that most benefits will be retained locally. To prevent the TVG from abusing its power, explicit distributional rules are made by the center.