Economic reforms and the evolution of China's total factor productivity

This paper investigates the impact of economic reforms on China's growth in total factor productivity (TFP). I build a model with two sectors in production - the private and the state sectors - that features capital market imperfections on the private sector. Following the removal of prohibitive barriers to private entrepreneurship (reforms), TFP gains follow the expansion of the private sector and the closure of the least productive state enterprises. Although the distribution of production technologies in both sectors is identical, the model generates persistently higher TFP in the private sector via a selection mechanism arising from financial frictions.