Bearing the legacy from central-planned system, the tax system in local China still lacks transparency and, in many cases, the liabilities of firms, especially those with extensive influences, are subject to negotiation despite the new tax-reform 1994. Applying Hirschman’s Exit-Voice theory, we construct a game model of interplay between firm and local government, in terms of exit and voice for preferential tax treatments, thereby revealing dynamics of these two options under rational entrepreneurship of economizing transaction cost. Suggested by the model, exit not only induces firm to opt for voice, it also underpins firm’s voice that forces local government to compromise. Particularly, when holding private information of exit cost, firm is able to mimic behaviors of those with high mobility so as to boost the effectiveness of voice. The empirical cases fully illustrate such rational entrepreneurship of exit plus voice to profit from local preferential policy.

China, Exit, Preferential Tax Treatments, Tax Competition, Voice
Firm (jel H32), Business Administration and Business Economics; Marketing; Accounting (jel M), New Firms; Startups (jel M13), Management of Technological Innovation and R&D (jel O32), Urban, Rural, and Regional Economics; Housing; Transportation (jel P25), Public Economics (jel P35), Government Policies; Regulatory Policies (jel R38), Regional Government Analysis: Other (jel R59)
Erasmus Research Institute of Management
hdl.handle.net/1765/7577
ERIM Report Series Research in Management
ERIM report series research in management Erasmus Research Institute of Management
Erasmus Research Institute of Management

Zhu, Z, Hendrikse, G.W.J, & Krug, B. (2006). Rational Entrepreneurship in Local China: Exit Plus Voice for Preferential Tax Treatments (No. ERS-2006-010-ORG). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/7577