Government Failure
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Government Failure

Society, Markets and Rules

Wilfred Dolfsma

This highly unique book takes a fundamental look at when and how a government can fail at its core responsibility of formulating rules. Government, representing society, relates to the economy by formulating the rules within which (market) players should operate. Although market and business failure are much discussed in the economics literature, government failure is often overlooked. This book addresses this gap, exploring in detail what constitutes government failure.
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Chapter 3: The G-Factor: weighing the visible hand of government intervention

Society, Markets and Rules

Killian J. McCarthy and Tao Zhu


In this chapter we analyze the Chinese property market to comment on the applicability of the current property ‘market models’ in economics but also to discuss China, and the current state of its journey to capitalism. Using a straightforward empirical model and employing data collected on the market performance of the real estate industry for the period 2000–10, we find that ‘market models’ explain as little as 1 per cent of the variance in property sales in this seemingly relatively unregulated market. Adding a variable that accounts for government intervention to the model specification creates a ‘regulated market model’. The predictive power of the model soars to 87 per cent. In the ‘regulated market model’ the significance of the price system disintegrates: government supply, and not price, dominates market dynamics. We provide evidence for the important role of government’s ‘visible hand’ in the Chinese property market even in a sector that seems relatively free from government meddling.

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