Summary： The rapid growth of the internet has facilitated the transformation of services and products and boosted the development of new service industries. As a result， increased demand to meet the mental and psychological needs growing out of feelings and experiences are becoming an important part of service consumption. Within a short period， new services， represented by the internet-based “happy consumption”， are capturing a dominant share of the market， and they are strong enough to reshape the traditional service industry. These new internet-based services are clearly characterized by scale economies， scope economies and the long-tail effect.
As information dissemination speeds up and all strata of society are vastly interconnected in the internet era， transaction and resource reorganization costs are decreasing. These are leading to comprehensive resource reorganization and aggregation. As the focal point of competition shifts to grabbing consumers' attention， new business models featuring aggregated demand and resources are emerging. A group of large enterprises represented by digital platforms compiles market resources， the application of feedback systems and big data collects signals of service quality， the expansion of the internet industry chain merges production resources and the formation of a sharing economy aggregates massive fragmented resources.
Facing these changes， traditional service economy theory is confronted with at least three challenges. First， the verdict of low productivity in the service industry does not hold. The productivity of the service industry is increasing dramatically as the internet transforms the provision of services. Second， the price formation mechanism is changing. The fixed cost of information services is generally high， whereas the marginal cost is close to zero， so the “average cost” and “marginal cost” can hardly be measured. The gross demand is inestimable， price fluctuations are very normal given that the market updates promptly and the process approaching equilibrium is unobservable. Neoclassical price theory is no longer practical to illustrate the price formation of information services. Third， as the interconnected society provides a wealth of information， the way people collect market signals is changing， and the choices people make based on these signals is correspondingly being altered. This leads to the transformation of “rationality”.
At the same time， research focused on internet economics is springing up， and internet economics is becoming an independent discipline. Internet economics covers a variety of content， ranging from access pricing， the construction and profit model， competition strategy and government regulation to competition， games and cooperation between different types of networks. The platform economy is a hot issue because it analyzes the network effect of the platforms， asymmetrical costs， monopolies， competition， innovation， externalities and government administration. The pricing of information products is turning into a specific research field consisting of information economics and internet economics. Many researchers in the internet era are incorporating new phenomena into the framework of their economic analyses and conducting research on how to design a more efficient market system， in addition to optimizing market-based resource allocation in the digital environment. Game theory is probably the most feasible way to analyze internet-based economic issues.
In sum， the internet and big data call for new requirements in theoretical innovation as new puzzlements and questions in economic activities， social order and people's lives are raised. The balance between privacy protection and data usage in internet-based services is a typical illustration. It is the government's responsibility to make prudent judgments on whether a phenomenon is reasonable or overheated. Hence， new challenges and questions require analysis， tradeoff and making choices at the theoretical level. New theories can help to set the criteria for policymaking， interpret the significance of policies， manage the tradeoff between various options， clarify public benefits and predict the future.
Key Words： Service Industry; Internet; Productivity; Theoretical Innovation

Summary： Today， both the scale and scope of Chinese human capital (HC) have achieved a high level. However， misallocation of HC hampers rapid economic growth; that is， high quality laborers are not perfectly matched with their work. This paper attempts to interpret (1) which frictions affect the process of HC distribution in China， (2) whether correcting HC misallocations will destabilize China's economic growth (hence， a conundrum) and (3) whether alternatives exist to resolve the conundrum and achieve stable growth.
We present an economic growth framework based on Romer (1990). The adaptations primarily concern two conditions in China： (1) there are frequent fluctuations in the HC supply caused by the government's significant influence on China's education system， and (2) most Chinese firms are capital-intensive; that is， marginal output depends on capital investment other than HC. Intuitively， as universities and colleges are largely government funded， they cater to the needs of the government. Furthermore， patent protection is imperfect in China; firms are encouraged to remain capital-intensive and ignore the innovative abilities of HC. The fluctuating supply and insufficient demand result in HC misallocation， which is different from a general equilibrium setting.
In the basic model of this paper， HC misallocation and less innovation lead to lower economic growth. Due to the enormous cost of reforming the funding system of China's higher education， we consider only changes in firms' profit functions. Inspired by Laffont & Tirole (1993)， we assume a scheme in which firms' profits are taxed and their innovations are rewarded， and the taxation and rewards are balanced by the government under shocks. We prove that although the scheme can solve the misallocation problem， it embeds fluctuations in HC supply in aggregate production， such that negative growth rates are possible. Therefore， HC misallocation is a growth conundrum.
To bypass the conundrum， we allow innovation to increase with the level of informational communication (information infrastructure ［IF］). Our analysis suggests that a high level of IF will elevate the economy from lower growth to higher growth. The intuition behind this result is unsophisticated： whereas HC is distributed among multiple firms， its aggregated innovation ability depends on the communication quality inside and outside the group. The truth of this theoretical result is tested using China's provincial-level data from 2001 to 2013.Overall， this paper suggests at least three implications： (1) HC misallocation cannot be resolved completely to avoid unstable economic growth; (2) a scheme that includes rewarding innovation can improve HC allocation and economic transformation， especially when patent protection is imperfect; and (3) IF is currently the key factor in promoting innovation by facilitating the joint communication of HC and information. Hence， it improves economic growth without completely correcting HC misallocation.
Key Words： Economic Transforming; Misallocation of Human Capital; Stable Growth

Summary： Most industrialized countries undergo structural change， reflected in the so-called “Kuznets facts”. China's spectacular economic growth over the past decades is also marked by the large reallocation of economic activities between its three broad sectors. According to the National Bureau of Statistics of China， from 1978 to 2015， the agricultural sector's employment share declined from 70.5% to 28.3%， accompanied by an increase in the industrial sector from 17.3% to 29.3% and a rise in the service sector from 12.2% to 42.4%. What accounts for these changes？ We answer this question through the lens of neoclassical theories of structural change.
Two broad sets of explanations for structural change are found in the literature. One emphasizes change to relative sectoral prices， or the Baumol effect， and the other emphasizes change to aggregate income， or the Engel effect. In addition， we argue China's experience suggests that factors like international trade， investment and labor market friction may also influence its structural change. To incorporate all of the potential determinants of China's structural change， we build a two-country four-sector neoclassical growth model that embeds the multi-sector Eaton & Kortum (2002) model of international trade， complete input-output structure， non-homothetic preference and labor market friction. We decompose the sectoral employment shares into six effects： the Baumol， Engel， investment， international trade， factor intensity and labor market friction effects. We then qualitatively analyze the direction and magnitude of each of these effects， and compare them with current theories in the literature.
We use our analytical framework to perform a quantitative investigation of the determinants' effects. We first construct data on the Chinese economy over the period 1978—2011， which are mainly derived from sources like the National Bureau of Statistics， Pen World Table and COMTRADE. We then quantify our model for the key features implied by the input-output structure and the sectoral composition of consumption from the Chinese economy. On the basis of data and calibrated parameters， we calculate the contributions of the six effects to changes in sectoral employment shares by the mean of accounting. We also perform counterfactual exercises with respect to each of the six effects， while holding others fixed. We find that the Engel， investment and labor market friction effects spark substantial changes in the employment shares of agriculture， industry and services， respectively. China's high agricultural employment share can be accounted for by the low demand elasticity of agriculture goods， high labor intensity and barriers to labor mobility. We also examine whether the importance of the six effects changes over different phases throughout the reform era.
Based on these findings， we suggest that factors from the demand side of the economy， like changes in the sectoral compositions of consumption and investment rates， may not continue to be the driving forces behind China's structural change. Policies favoring reform to the supply side of the economy， like adopting advanced agriculture technology and eliminating labor mobility friction， should be advocated to further advance China's structural change.
Key Words： Structural Change; Chinese Economy; Multi-sector Model

Summary： “Smith-Young theorem” posits that expanding market size will accelerate economic growth by virtue of division, which means the emergence of market segmentation will harm economic growth by restricting markets and division. However, the rapid growth of China following its reformation is realized in a heavily segmented market, which seems to contradict “Smith-Young theorem”. Thus, the real question is why segmentation continues in such a rapidly developing national body. We raise a bold hypothesis: regardless of whether market segmentation or market expansion is involved, its effect on economic growth is not absolute. When certain conditions are satisfied, segmentation can also accelerate economic growth. It is a pity we know so little about these conditions. This paper should move the field forward from both the theoretical and empirical perspectives.
Theoretically, the expansion of market size connects different regional markets and accelerates overall growth. However, market segmentation divides the entire market into separate regional markets. Thus, if segmentation accelerates growth, such growth should take place within the regions. Decentralization also provides local governments with a strong incentive to pursue regional growth. Accordingly, in analyzing segmentation's effect on growth, we should distinguish between regional and overall growth. Traditional growth models that simply combine the segments of regional growth into overall growth cannot be used because these two growth patterns probably contradict each other.
Focusing on the critical role local government plays in industrial development and market segmentation, we introduce heterogeneous producers into an oligopolistic model. We find that under competitive conditions among producers with linear demands and cost functions, market segmentation accelerates regional economic growth through both production competition and price competition. However, with production competition, market segmentation harms the entire economy, whereas with price competition, it benefits the entire economy within limitations. Further analysis shows that the greater the industrial similarity, the less significant the harmful effects of segmentation on overall growth. As the theoretical model suggests, the effect of segmentation on regional growth varies under different conditions. Therefore, a new method should be introduced to distinguish segmentation under these disparate conditions. To realize this goal, we combine “production method” and “price method” to calculate a more scientific sample in which the panel data are processed by virtue of varying coefficient models. We find that every province has at least one strong stable competitor in industrial substitution, which leads to stable market segmentation and may be highly correlated with corruption. Furthermore, segmentation accelerates regional economic growth through industrial similarity, which is constrained to some extent by open policy and business cycles. Thus, reducing industrial similarity is the only path to eliminating segmentation and realizing market integration.
In one word, if specialization and integration are supplementary to each other, industrial similarity and market segmentation will coexist. Furthermore, they both point to a common goal: growth. This seems to prove one old Chinese proverb: the empire long divided must unite; long united, it must divide. Therefore, future analysis should combine research on integration and segmentation to achieve a deeper understanding of the economic reasons behind a nation's unification and disruption and to contribute to the final realization of human beings' “great harmony”.
Key Words： Market Segmentation; Economic Growth; Industrial Similarity

Summary： Tax reduction has always been the main means to attract capital. The developed markets with a high capital gain tax, however, do not seem to lack capital. Is it a good investment environment that retains capital？ Nowadays, economic downturn and income inequality become serious in China while the economic growth of the developed countries is relatively stable and income inequality is not serious. What does this imply for the capital flows？ Obviously, there are complex associations between the following five variables: tax competition, capital outflow, investment environment, economic growth and income inequality.
This paper aims to clarify the relationships between these variables in the non-cooperative open economic framework. Following Alesina & Rodrik (1994), this paper assumes that an economy consists of two jurisdictions. There are workers who cannot move and consume all their incomes instead of saving in every jurisdiction; the capital owners do not work but invest. The governments of each jurisdiction adopt a balanced budget. Competition and benefit maximization drive the production factors to reach the marginal output. The propositions of our model are as follows: (1) the heavier the capital tax burden, the more severe the capital outflow; (2) if the investment environment improves, capital inflows promote economic growth and workers obtain labor remuneration through capital, which restrains income inequality to a certain extent. If the investment environment worsens, capital outflow occurs to seek higher returns, thereby decelerating local economic growth. Workers cannot obtain income through capital investment anymore, which widens income inequality to a certain extent.
This paper adopts the provinces of China as its jurisdictions and uses provincial data from 2000 to 2009. Investment environment variables include technical attainments and conversion, market access restrictions, simplicity of administrative approval system, producers' legal rights protection and market deepening degree. A simultaneous equations model (SEM) is built and applies 3SLS and GMM to estimate the data. Three propositions from the theoretical model are empirically tested. The first is caused by taxation: high tax burden→capital outflow→economic growth slowdown→income inequality exacerbated→hign tax burden. The second is caused by an investment environment upgrade: investment environment improved→capital inflows→economic growth accelerated→income inequality improved→low tax burden. When we pool the two outcomes from these propositions, we arrive at the third argument regarding the hedging effect of an investment environment upgrade on tax burden: high tax burden→capital outflow→economic growth slowdown→income inequality exacerbated→high tax burden→investment environment improved→capital inflows→economic growth accelerated→income inequality improved→low tax burden. The robustness tests further validate the theoretical propositions.
This paper proposes some policy suggestions based on the theoretical conclusions and empirical test results. First, maintaining a modest tax burden on capital gains restrains income inequality. Second, it is crucial to improve the investment environment to attract capital and promote economic growth. Finally, it is important to establish a parallel public policy incentive system of economic growth and equitable income distribution.
Key Words： Tax Competition; Capital Outflow; Investment Environment; Economic Growth; Income Distribution

Summary： Nowadays, family background and social relations have become important factors affecting the development of individual careers, which not only damages social equity and justice, but also discourages economic growth. All Chinese people are chasing the Chinese Dream and want access to the same channels and platforms of upward flow. Thus, within the current social context, we ask whether disadvantaged groups can change their destinies through their effort. This question is tested from the perspective of inequality of opportunity to provide a quantitative foundation upon which the government can design a redistribution policy.
Inequality of opportunity equates with income inequality resulting from environmental differences. The lower a disadvantaged individual's income distribution status, the greater the inequality of opportunity. Therefore, to determine whether effort can change one's destiny, we test a more workable proposition, that is, whether improving one's efforts can reduce the degree of one's inequality of opportunity. To this end, this paper divides the “China General Social Survey” sample into four cohorts according to date of birth: 1950—1959, 1960—1969, 1970—1979 and 1980—1989. It then uses a nonparametric method with an ex post perspective to calculate the inequality of opportunity index based on the actual income distribution of the different age cohorts. The propensity score matching (PSM) method based on the random parameter Logit model is also used to construct the “counterfactual” income distribution for all individuals when they are making their highest effort, and then to calculate and compare the difference in the inequality of opportunity between the real income and “counterfactual” income distribution to determine whether improving effort can reduce inequality of opportunity. The empirical results show that with the efforts of all residents reaching their highest level, the inequality of opportunity among all four cohorts is reduced. However, the decline is significantly different between them. For those born between 1950 and 1959, the inequality of opportunity is reduced by just 4.98%; for people born between 1960 and 1969 or 1970 to 1979, it declines by as much as 50%; and for those born between 1980 and 1989, it declines by 22%. In addition, there is significant heterogeneity among the redistribution effects due to the improved efforts of different cohorts. This can explain the differences in the reduction of the inequality of opportunity among the different cohorts. Finally, to a great extent, the difference in effort and the return on effort among the different cohorts can explain differences in the redistribution effect among the different cohorts caused by improved efforts. Based on these empirical results, this paper offers some policy suggestions. Governments should build an accurate poverty alleviation and social assistance system and focus on improving the developmental ability of disadvantaged groups. They should also solve difficulties through education, employment and starting businesses to create conditions for disadvantaged groups to succeed through their efforts. Compared with the current research, this paper is innovative in two ways. First, from the research perspective, it does not simply measure the inequality of opportunity, but tests whether improving effort can reduce inequality of opportunity. Second, from the methodological perspective, it combines a quasi-natural experimental method with a measure of inequality of opportunity and uses a matching method based on the random parameter Logit model.
Key Words： Environments; Efforts; Inequality of Opportunity; Counterfactual Income; Random Parameters PSM Model

Summary： Are smart people more willing to become entrepreneurs？ The literature asserts there are a number of factors that influence entrepreneurship. However， very few empirical studies address the role of cognitive ability (Djankov et al.， 2005; Djankov et al.， 2006a; Levine and Rubinstein， 2016). Among those that do， several recent studies find that cognitive abilities have significantly positive effects on entrepreneurship. Does this belief still exist in China， or is there any difference？ We try to answer these questions in this paper.
We are the first to use the large-sample data from the Chinese Family Panel Studies (CFPS) of 2010 and 2012 to explore the effect of cognitive abilities (i.e.， smartness) on entrepreneurship. After controlling for the endogeneity problem， regressions show no significant effect for Chinese people， regardless of the type of entrepreneurship. In this sense， smart Chinese people are on average not more willing to become entrepreneurs， a finding that seems inconsistent with the current international fact. However， when using the industrial regulation data from Shi et al. (2007) and dividing the entire sample into two subsamples： “loosely regulated” versus “tightly regulated” industries， we find a significantly negative correlation between cognitive abilities and entrepreneurship in tightly regulated industries， and a significantly positive correlation in loosely regulated industries. Thus， smart Chinese people are more willing to become entrepreneurs in loosely regulated industries.
Furthermore， we study the effect of three dimensions of cognitive abilities (character recognition， counting ability and memory ability) on entrepreneurship. The results show that whereas the effect of memory ability on entrepreneurship is not significant， the effect of counting ability is significantly positive. The effects of character recognition and counting ability on entrepreneurship differ between tightly and loosely regulated industries; however， the results are not robust.
This paper overcomes three shortcomings of the current related studies. First， the use of a large empirical sample improves the representativeness of our conclusions. Second， after controlling for the endogenous problem of cognitive abilities， we can guarantee the lack of bias in the regression's findings. Third， we emphasize the role of government regulation in moderating the effect of cognitive abilities on entrepreneurship across industries. This is especially important in China， where government regulations are widespread and the market mechanism is still underdeveloped.
We argue that from the perspective of regulations， a better understanding of the role cognitive abilities play in entrepreneurship may help the government make and improve public policies concerning entrepreneurship. Our results suggest that this is vital to reducing both unnecessary and improper government intervention in China， especially in tightly regulated industries， where more smart people are willing to become entrepreneurs.
Key Words： Entrepreneur; Cognitive Abilities; Institutional Environment

Summary： In developing countries， community networks based on strong interpersonal ties such as kinship， geographical proximity and common educational or vocational experience play an important role in the labor market. Traditionally， these networks are linked to nepotism， rent seeking， corruption and market segmentation. However， recent research posits that they can also act as supplements for formal price mechanisms. When recruiting information is shared within a community， recommendations help employers find employees more efficiently. Contracts even become self-enforcing when multilateral reputation mechanisms make commitments credible.
Many of the current studies have two limitations. First， most use household data to examine the effect of community networks on an individual's employment and income. However， under imperfect institutions， higher individual income may result from nepotism， which does not necessarily improve the efficiency of labor resource allocation. Second， the current research draws different (oppositional) conclusions. The best explanation for this is that the transactional efficiency of community networks depends on the cost of anonymous transactions， which differ among countries with varying degrees of marketization.
We explore the role of community networks in labor resource allocation using an enterprise's productivity as the dependent variable. First， we construct a regional level index of community networks using the Chinese General Social Survey (2008)， which is then matched to Fan's marketization index. Second， the matched data are used to identify the effects of community networks on an enterprise's total factor productivity (TFP) in regions with disparate degrees of marketization. The results show that although community networks have a significant positive effect on an enterprise's TFP in areas with a low degree of marketization， the effect decreases with a higher degree of marketization. When two channels of effects (information transmission and recommendations) are distinguished， the latter is more significant.
This conclusion is also based on analysis of China's market transition. In the early period of its marketization， China's labor market faces a series of institutional barriers. First， the Hukou system results in segmentation between the urban and rural areas， restricting labor mobility (especially rural labor). Second， public services such as health care， housing and children's education are much better in the state-owned sector than in other sectors， which increases the cost of leaving the state-owned sector. Finally， lack of property rights protection reduces trust between employers and employees. All of these barriers result in the thin labor market and high transaction costs in China， which can be reduced through community networks. However， marketization reform decreases institutional barriers and raises the anonymous transaction efficiency of the labor market. During this process， the positive effect of community networks declines， and nepotism and market segmentation gradually dominate.
Our contributions may include the following. First， this study concentrates on the general equilibrium effects of community networks on an enterprise's productivity. This approach helps us to understand the role of community networks， and provides a new explanation for the conflicting results in the current research. Second， this study contributes to empirical research on the economic effects of informal institutions. The existing research pays more attention to the economic role of formal rather than informal institutions， including community networks. However， this study shows that their effects on an enterprise's TFP are interchangeable， providing evidence of a new institutional economic theory from the perspective of a large transitioning economy. Third， this study deepens understanding of the institutional factors underlying the misallocation of resources in China by providing a new explanation for the stylized notion of regional differences in firms' TFP.
Key Words： Community Networks; Marketization Process; Enterprise Productivity

Summary： There are two key features of transitioning economies： the prevalence of state ownership and the progress of marketization. This study investigates the effect of non-controlling state and private shareholders on firm performance， and links these effects to the level of marketization.
A large stream of corporate governance research investigating the effects of non-controlling shareholders (NCS) on firm performance has been produced over the past 20 years. We argue that the identities of the NCS and the institutional environment are important to shaping outcomes attributable to the presence of the NCS. The management of SOEs (i.e.， where the controlling shareholder is state-owned) is generally less marketed than that of private firms due to the government's probable choice of social and political policy goals over profit maximization and its greater information asymmetries. As a result， in SOEs， privately owned NCS generate value because they have the incentives and voting power to constrain the political objectives of the controlling state-owned shareholder. Conversely， private firms often face unequal treatment in financing and taxation in less marketized economies. State-owned NCS can bring political connections to private firms， help overcome market and state-level disadvantages and seek government-related benefits (“political connections effect”). In a transitioning economy， heterogeneity among shareholders is complementary because it takes advantage of different ownership. These effects can weaken with the progress of marketization and partly explain the conflicting results in the literature.
Being one of the largest transitioning economies， China provides an ideal setting in which to examine the mixed evidence on the effect of NCS. As an outcome of SOE reform， there are a large number of state-/privately owned NCS in firms listed on the Chinese stock market. In addition， during the past decade， in which China has transitioned from a centrally planned to a market-oriented economy (an ongoing transition)， the unbalanced development of its different regions has provided improved variation across levels of marketization， enabling us to better understand the governance role of NCS.
We construct a new database by gathering ownership data from more than 20，000 annual reports. We empirically investigate the governance role of privately and state-owned NCS on firm performance in private firms and SOEs， respectively. We find that (1) the presence of private NCS is associated with better firm performance in SOEs and private firms， with the effects in SOEs being generally larger， and (2) state-owned NCS improve the performance of private firms， but this leads to worse performance in SOEs. That is， mixed ownership is beneficial for both SOEs and private firms. Our results also show that private ownership strengthens the relationship between managers' wages， turnover and firm performance in SOEs， and that state ownership alleviates the tax burden and financing constraints in private firms. The effect of mixed ownership is more pronounced in less marketized regions.
This paper lends support to the ongoing “mix-ownership reform” in China， which encourages the private sector to invest in SOEs because mixed ownership makes up for the lack of marketization. Given the long march toward complete marketization， mixed ownership could be a long-lasting phenomenon， beneficial to both SOEs and private firms along the way. However， the logic underlying the effect of mixed ownership is different for SOEs and private firms. Furthermore， the results show that state-owned NCS generate little， if any， value in SOEs.
Key Words： Non-controlling State Shareholders; Non-controlling Private Shareholders; Corporate Governance; Mixed-ownership Reform

Summary： After many years of high-speed development， China's traditional growth mode has been challenged by environmental constraints， weak external demand and excessive production capacity. China needs to find new growth momentum through supply-side reform.One core part of supply-side reform involves guiding enterprises entering new industries. Although China has made great progress in the construction of “hardware”in the business environment， there is still a lack of “software”. One of the shortcomings in this regard is the inefficiency of financial contract enforcement.
Inefficiency with financial contract enforcement leads to an environment of incomplete contracts. When enterprises make deals with financial institutions， the institutions may be “held up” by the enterprises. To compensate for their potential loss， financial institutions add institutional markups to their lending rates. The markup in turn pushes up the lending rate， and the increase in the lending rate leads to arise in costs. Whether a firm enters the market depends on weighing the profits against the fixed costs incurred by this barrier. Improvement to the enforcement of financial contracts will reduce enterprise costs， and relatively cheaper inputs should boost margins， thereby encouraging enterprises to enter the market.At the same time， as more enterprises enter the market， excess profits gradually disappear and the market returns to equilibrium. However， the dynamic process reduces the concentration of the market， raising the level of competition. To demonstrate this mechanism， this paper incorporates the incomplete contract and Cournot competition into a DGE model to explain how the enforcement of financial contracts affects market entry and competition. We find that the more contracts are enforced， the more firms enter the market. Moreover， as the finance-dependent industry has a larger proportion of financing costs， when financial contracts are enforced， the industry expands faster than others.
We use data from Chinese industrial enterprises between 1998 and 2007 to test some theoretical results. Several results are produced. First， from a nationwide perspective， the better the enforcement of financial contracts， the more firms enter the market，and firms with stronger financing dependence are more sensitive to changes in contract enforcement. This conclusion is consistent with the theoretical results. Second， from a regional perspective， the middle area of the country benefits the most from institution building， perhaps due to the low base of enterprises in the middle area. The sample capacity of the middle region is only one fifth that of the eastern region， so having fewer enterprises can also lead to greater changes to industry entry rates and market concentration. Third， from an industrial perspective， a tech-intensive industry is less sensitive to contract enforcement than labor-intensive and capital-intensive industries. This may be due to one of the most important findings identified in this paper： enterprises that need to raise funds for their material capital investment depend on external financing and financial contract enforcement. In contrast， tech-intensive industries rely on human capital and advanced technologies rather than physical capital.
This paper contributes by enriching research on the relationship between institutions and market competition. In particular， it makes use of the theory of incomplete contracts to explain how financial contract enforcement affects entry into the market and market competition through finance costs. Additionally， by incorporating the incomplete contract and Cournot competition into a DGE model as part of our qualitative analysis， we obtain corresponding quantitative results based on micro data. Although the framework can reasonably explain changes to manufacturing， entry into and competition within the service industry are not covered in this paper. We hope future research will pay more attention to how institutional factors affect the development of the service industry.
Key Words： Financial Contract Enforcement; Entry; Market Competition

Summary： With continuing openness in China， what kind of effect will there be on the innovative activities of Chinese domestic firms when they fully participate in the global value chain division and trade system driven and controlled by the developed countries？ This is the core issue behind the transformation of China's economically sustainable growth mechanism. Answering this query is essential and meaningful for both theoretical study and policy practice. Accordingly， we attempt to evaluate the innovative effect of import and export activities while relying on novel firm-level data from China.
Based on the stylized notion of “imports induced by exports”， for Chinese domestic firms involved in the global value chain， we integrate intermediate goods imports and exports into a unified framework to empirically investigate their influence on the innovative activities of Chinese domestic firms. We find that from the import perspective， import behavior promotes the innovative activities of general trade firms， but inhibits the innovative activities of processing trade firms. Additionally， in distinguishing between the different types of ownership， imports have a stronger promotional effect on the innovative activities of private firms engaged in general trade. However， they continue to have an inhibiting effect on private firms involved with processing trade. From the perspective of exports， neither general nor processing exports show remarkable implications for innovation among Chinese domestic firms. We also find that both export and import activities with developed countries have considerable inhibitory effects on the innovative activities of Chinese domestic firms， and that these effects are larger for private firms. To some extent， these conclusions verify the global value chain capture hypothesis as it relates to Chinese domestic firms.
The empirical results provide a meaningful policy reference for how to effectively implement China's strategy of innovation-driven development while continuing to promote a degree of openness. Processing trade firms should minimize the negative effects of their participation in the global value chain by transitioning to the production of high-tech intermediate products and insisting on the diversification of export destinations. Private firms participating in general trade should expand the promotion of their independent innovative abilities through “learning by importing”. They should also offset the global value chain's negative effects on independent innovation by diversifying their export destinations.
This paper makes two contributions. First， it creates an instrumental variable system of export and import behavior that reflects stylized Chinese characteristics. Second， it provides the first evidence of the effect of trade activities on innovation by combining those two trade modes into a unified framework. Finally， it widely investigates the heterogeneity of general and processing trade and constructs instrumental variables for general and processing trade firms， respectively.
Key Words： Chinese Domestic Firms; Global Value Chain; Mechanism of Imports Induced by Exports; Innovation; Captive Effect

Summary： Multidimensional high uncertainties exist during a firm's innovation process in areas such as funding， technology， the market and policy， among which funding uncertainty is the most critical. Therefore， analyzing and identifying the economic mechanism through which cash flow uncertainty affects an innovative firm's R&D strategy and value has rich and important implications for innovative firms wanting to manage the uncertainty and make efficient innovative decisions under complicated and changing circumstances.
We identify the economic mechanism through which cash flow uncertainty affects an innovative firm's R&D strategy and firm value， and find that positive/negative cash flow shock has a funding/precautionary effect on R&D strategy. These two opposite effects offset each other. Under the funding effect， innovative firms focus on the “opportunity” side of cash flow uncertainty， which stimulates more R&D investment. A positive cash flow shock mitigates financing constraints and increases the probability of winning， thereby appreciating a firm's value. Conversely， under the precautionary effect， innovative firms reinforce the “risk” side of cash flow uncertainty， and discourage R&D investment to hoard more liquidity and avoid potential financial distress. A negative cash flow shock incurs higher financing costs and longer financing rounds， thereby decreasing the probability of winning and depreciating the firm's value.
We establish a theoretical model to extend the extant framework by integrating the characteristics of the winner's advantage and market friction in an innovative industry. We investigate the innovative firm's optimal tradeoff between R&D and cash holdings， and explore the effect of cash flow uncertainty on an innovative firm's R&D strategy and firm value. The results indicate that having a winner's advantage influences both the funding and the precautionary effect. Specifically， when the winner's advantage is strong， the funding effect dominates to spur more aggressive R&D， and finally the cash flow uncertainty increases the firm value. Conversely， when the winner's advantage is weak， the precautionary effect dominates， pushing the innovative firm to cut R&D， and finally the cash flow uncertainty decreases the firm's value. Specifically， the marginal utility of cash flow is large around the financial constraints boundary， and cash flow uncertainty significantly mitigates financial constraints and increases the firm's value. In addition， the presence of market friction can result in cash flow uncertainty having a more complicated effect upon an innovative firm's R&D strategy and firm value.
The results offer great guidance for the government to carry out policymaking and regulations to create a better external environment for firm innovation from the macro perspective. Alternatively， from the micro perspective， the results shed a novel light on an innovative firm's efficient management of cash flow uncertainty and the optimal tradeoff between R&D and cash holdings that ensure it fully grasps the “opportunity” side and controls the “risk” side of uncertainty and makes effective innovations.
Key Words： Cash Flow Uncertainty; Winner's Advantage; Market Friction; Funding Effect; Precautionary Effect

Summary： It is important for both regulatory agencies and researchers to create policy evaluations and optimal designs for increasing block pricing. First， we survey the nonlinear pricing policy evaluation literature. By comparing a structural econometric model with a reduced-form econometric model， we use the sufficient statistics method to evaluate increasing Chinese block pricing policy. In theory， we create a semi-structured model of sufficient statistics that can evaluate and optimize increasing block pricing by solving the sufficient statistics of welfare loss and the redistribution effect of increasing block pricing. Based on 5，000 Hangzhou residents' monthly electricity consumption data， randomly selected from the State Grid from 2003 to 2011， we first evaluate the policy effect of implementing and adjusting the increasing block pricing during the sample period. We then create optimal designs for the pricing mechanism to further assess the latest price adjustment policy of Hangzhou in 2012.
The theoretical and empirical results show the following.
(1) Block pricing brings an efficient reallocation of income. The welfare loss allocation effect rates from the implementation and adjustment of Hangzhou's block pricing in 2004 and 2006 rise from 69.52% to 73.30%. The marginal welfare loss of block pricing declines from 0.44 yuan to 0.36 yuan， which almost equals the marginal welfare loss from tax. This shows that the efficiency of the redistribution is improved by introducing the block pricing system.
(2) The welfare loss allocation effect of time-of-use block pricing is lower than that of pure block pricing. Time-of-use block pricing cannot effectively achieve the objective of block pricing. The aims of time-of-use and block pricing are contradictory. Furthermore， the welfare loss allocation effect of time-of-use block pricing is lower than that of pure block pricing， regardless of whether it is at a peak or valley period. In particular， the welfare loss allocation effect of block pricing during valley periods is much lower， resulting in larger welfare losses. The government should use time-of-use block pricing very carefully.
(3) The sufficient statistics approach can be used to improve the design of block pricing， and the current block pricing system can be improved in terms of the rates of its welfare loss allocation effect. The latest block pricing adjustment in 2012 is going in the right direction compared with the optimal block pricing mechanism. However， some improvements are still needed， as the 2012 block pricing system has too much length expansion in the first block and too little length expansion and a price increase in the second block.
(4) The sufficient statistics method greatly saves the amount of information data and can conduct better welfare analysis than the structure and reduced-form model. It can save the costs relating to policy decision making， and provide a feasible path for the mechanism's design. Finally， it can be widely applied to policy evaluations of the government's public utilities.
In conclusion， the sufficient statistics method has a lower data requirement for policy evaluation. It can also connect the advantages of the structural and reduced-form models. This paper opens up a new way to reliably assess and optimize public utilities.
Key Words： Increasing Block Pricing; Sufficient Statistics; Policy Evaluation; Optimal Design; Semi-structured Model

Summary： In an expert service market， consumers know little about the level or quality of the services they need， so they rely on the advice of experts. We model a situation in which experts can freely send diagnostic signals to consumers， informing them of the level of their demands， and recommend verifiable treatments accordingly. The credence goods literature typically studies the effect of price menus as a signal of market equilibrium. Nevertheless， when prices are exogenously determined， the cheap talk signal from expert diagnosis becomes the only signal available， and few studies pay attention to this scenario. We analyze equilibrium in the expert service market through a cheap talk game where expert diagnosis is the only available signal and two types of experts coexist： honest and selfish experts.
We assume honest experts always send truthful signals and provide the most desirable treatment of consumers. In a monopolistic expert service market， the cheap talk signals are partially informative. The perfect Bayesian equilibrium in this market has three important characteristics. (1) The equilibrium is pooled at the top and separated at the bottom. Selfish experts do not send signals lower than a certain threshold value of demand. Their signals are continuously distributed over the upper-end of the space above the threshold. (2) When the signal is lower than the threshold， consumers fully trust it. However， when the signal is above the threshold， consumers' beliefs about their demands are not affected by cheap talk signals. (3) If the signaling strategy is a monotone (the expected value of the random signal rises as its true state increases)， then selfish experts will randomly exaggerate the true state of the demand and are more likely to send higher signals. Consumers， however， trust less as the signal goes higher. As a result， those who have low demands are over-treated， and those who have high demands are under-treated.
Pooling at the top and separation at the bottom are caused by selfish experts trying to imitate the signals sent by honest experts， but only when the profits are sufficiently high. As a signal goes higher， the profit increases once a consumer accepts the treatment; however， the probability of a consumer believing the signal is real also falls. The tradeoff between profit and trust restrains the selfish experts' signaling strategy to a probability distribution that gives an equal expected profit to each signal within its support. In addition， by imposing a condition that selfish experts send signals from the same distribution point regardless of the true state， the selfish experts' signaling strategy has a tractable solution. Comparative statistics suggest that an increase in the proportion of honest experts hurts low-demand consumers more when they encounter selfish experts. Furthermore， price regulation such as lowering the service price ceiling results in selfish experts sending increasingly higher signals， which in turn lowers the consumers' trust level. Policymakers should be wary of these adverse effects when they consider measures such as cultivating professional conduct and price regulations.
We further discuss the effects of introducing a competitive market structure and lowering consumer search costs. Obtaining a second opinion should provide consumers with more information about their true type， and we find that the fraudulent behavior of experts diminishes when consumers can search for other advice more easily.
Key Words： Expert Service Market; Cheap Talk Game; Social Preference; Partial Pooling Equilibrium