Estimating firm behavior under rationing: A case study of the Chinese manufacturing industry

Abstract

The centrally planned economies often experience the shortage problem. The typical response of the government to handle this problem is to reduce the demand by means of rationing. It is therefore interesting to examine how firms would behave when input rationing occurs. To do that, we first use the virtual price approach to derive the relationships between rationed and unrationed elasticities. Based on these relationships, we then use a set of the Chinese manufacturing industry data for estimation. We find that the values of the rationed elasticities are generally lower than those of the unrationed elasticities.