On the distributional effects of principal-agent problems: Evidence from China’s shell farmer cooperatives

Abstract

This paper examines the distributional consequences of a poignant example of the principal-agent problem in China: local officials and the public (i.e. the agents) establish “shell cooperatives” that only exist in name at the urging of the central government (i.e. the principal). Using a novel data on the county-level shell cooperatives from the State Administration for Industry and Commerce of China, we investigate the effects of the shell cooperative problem on local poverty alleviation. Our results suggest that rural households in counties that were exposed to a more severe shell cooperative problem were associated with a reduced income per capita, an increased income gap, and a lower probability of staying out of poverty. We also find supportive evidence for the plausible mechanisms behind the distributional effects of the shell cooperative problem: decreased subsidy availability, restricted financial access, reduced public goods provision and undermined social trust. Overall, our study offers a novel perspective to shed light on the distributional consequences of the principal-agent problem.