Manufacturing is the foundation of developing countries and provides support to major economies. It plays a key role in a country becoming rich and powerful. High-standard and more competitive manufacturing is a basic requirement for high-quality development. China's economic development is undergoing a rapid transition that requires manufacturing to build a modern socialist China and to develop the real economy. The government sees high-quality manufacturing as one of the most important drivers of high-quality development. China's manufacturing industry is growing rapidly and opening up constantly during the reform era. To what extent does China's high-standard opening-up affect its manufacturing development and global welfare？ How should China continue to promote structural transformation during its reform and opening-up？ Studies fail to answer these questions either theoretically or quantitatively from a macroeconomic perspective. This paper studies the macroeconomic effects of the cost of trade on China's manufacturing development and global welfare through theoretical analysis and quantitative experiments, which may offer novel answers to these questions.
We build a two-country multi-sector structural change model with complete input-output links, endogenous consumption and investment structure, and endogenous international trade shares. The model incorporates long-term income effects, structural changes in investment, and sectoral trade imbalance, which are the key features of China's economy. Theoretically, the fall in export trade costs decreases the price of China's manufacturing goods in the global market, which in turn increases their relative demand across the world, as well as the share of manufacturing in China's economy. It may also lower the average price of consumption goods sold to foreign people, which increases their purchasing power and welfare.
We apply the model to China's economy to account for the process of opening-up and manufacturing development. We find that the fall in the trade cost of Chinese exports from 1995 to 2010 enhances the comparative advantage of China's manufacturing, which in turn increases China's manufacturing output by 29% and thereby increases the employment and output share of manufacturing by 4.7 and 5.1 percentage points, respectively. It also accounts for nearly 15% of the growth of foreign welfare. Almost 80% of these effects emerged after 2001, when China joined the World Trade Organization. Moreover, imposing tariffs on Chinese goods to raise the trade cost of Chinese exports will not only hinder the development of China's manufacturing but also result in significant foreign welfare loss. If the trade cost of Chinese exports rises by 1 unit, manufacturing output will decline by 5.37 percent, with its employment share falling by 3.32 percentage points, and foreign welfare will also decrease by 0.89 percent.
Mounting protectionism, the dim prospects of the world economy, the shrinking global market, and the backlash against economic globalization have added to the risks and uncertainties in China's development. China should become a quality manufacturer to foster the new development dynamic.
We derive two policy implications from the findings of this paper. First, China should vigorously pursue admission to new regional trade agreements, advocate for new multilateral trading systems, and promote its manufacturing and market. Developing high-quality manufacturing in China may also help to build a higher-standard open economy and offer many opportunities for the world. China should also reinforce high-standard domestic and international circulations to enhance the competitiveness of its manufacturing across the globe. Policies such as encouraging international trade in producer services or building a pilot digital trade zone may promote technological innovation and structural updating of China's manufacturing industry. Second, China should further reform its factor market to improve factor allocation efficiency. This may lower the domestic cost of trade to form a unified national market and domestic circulation, which will in turn enhance the resilience of China's supply chain. China should also promote timely investment in new types of manufacturing, secure the production and supply of energy, and effectively tackle the problem of rising costs of manufacturing production and trade.

In China's current development stage with its new development dynamic, household consumption plays a prominent role in economic development and is essential for unleashing the potential of the domestic market and promoting the development of the Chinese economy. The literature demonstrates that consumer credit and a wider range of moderate household indebtedness have intertemporal and wealth effects on consumption, which allow household consumption to stay on the optimal route under the persistent income hypothesis and then promote household consumption by exploiting the effect of leverage.However, the household sector has bewildering phenomenon that rising debt level and weak consumption growth coexist at present in recent years.Thus it is worth checking out that the probability of household financial distress caused by overdraft effect and debt repayment risk due to mounting debts will constrain consumption.Therefore, given the high risk of household sector indebtedness in China, it is important to further investigate the effect of rising leverage on household consumption from the perspective of potential household financial distress. This paper explores whether and how leverage affects household consumption behavior by introducing household financial fragility.
This paper constructs an intertemporal optimal consumption decision-making model that considers household financial fragility and identifies how the rising household debt level influences this fragility, resulting in heterogeneous household consumption behavior, and testify the relations among household leverage, financial fragility and household consumption heterogeneity with the China Household Financial Survey data 2015 and 2017.The results show that higher leverage increases household financial fragility, which results in deviation from the optimal intertemporal consumption by weakening the ability to smooth consumption and strengthening the budget constraint of consumption, and thus household consumption exhibits the features of “high marginal propensity to consume, low level of consumption expenditure”.
This paper further respectively analyzes whether the effects of household leverage on consumption has a clear difference in debt structures and consumption structures, and between urban and rural areas.The results show that for households that invest in more than one residence, higher leverage significantly increases their financial fragility under uncertainty shocks and has a greater negative effect on consumption. Private loans from relatives provide a relatively flexible mechanism to meet obligations, and therefore weaken the negative impact of leverage on household consumption through the financial fragility channel. The financial fragility caused by the increase in leverage has a greater negative effect on consumption expenditure on durable goods. Moreover, given the differences in consumption between urban and rural households, The household financial fragility due to the rising leverage hasgreater crowding-out effect on rural households than on urban households.
The marginal contributions of this paper are as follows. First, this study emphasizes that financial fragility is the key factor in understanding the relationship between household leverage and consumption decisions. It shows that leverage affects household consumption through financial fragility by weakening the ability of smoothing intertemporal consumption and intensifying household budget constraints.. It also demonstrates how household leverage influences consumption behavior, and thus explains the rationale behind the high marginal propensity to consume and the low levels of consumption expenditure in the household sector. Thus, this paper supplements the relevant literature on the effect of household debt accumulation on consumption expenditure. Second, this paper measures household financial fragility by the financial margin of unpredictable expenditure under uncertainty shocks; estimates the marginal propensity to consume function and logarithmic consumption expenditure function; and demonstrates how financial fragility affects consumption when household leverage rises. This provides empirical evidence of the dynamic effect of household debt accumulation on consumption behavior. Third, the theoretical analysis and empirical evidence help to explain the coexistence of the rapid increase in household leverage and the slow growth of household consumption expenditure and clarify that policymakers should comprehensively consider the impact of household leverage on consumption and potential financial risks when designing financial policies to promote consumption. The paper has important policy implications for promoting supply-side reform, serving the real economy, and guarding against systemic financial risk.

Effectively identifying and preventing risks from problem banks and improving financial security and the emergency response mechanism are increasingly important practical problems. As an important part of the financial safety net, the deposit insurance system can play an early-warning role in dynamic supervision and in the disposal of financial risks.
Regarding the effectiveness of the deposit insurance system, the prevailing view is that a poorly designed system increases the risk of a bank crisis. However, an incentive compatible design can weaken the adverse impact of moral hazards. As an important part of the risk-minimization design of the deposit insurance system, a differential rate can effectively reduce moral hazards in banking.
China established its deposit insurance system in 2015. Domestic scholars discuss the positive and negative effects of deposit insurance on China's banking system, emphasizing how it can prevent risk exposure and the response of regional banks and how to coordinate it with other financial reform measures. Considering these practical problems and research backgrounds, this paper theoretically analyzes the inhibitory effect of the differential rate mechanism on bank risk before and after the implementation of the deposit insurance system. By expanding the model of Freixas and Rochet (2008), it is proved that a differential rate, compared with a fixed rate, can inhibit high-risk investment behavior by banks and alleviate moral hazards. Moreover, a differential rate based on risk makes early correction more effective. This paper selects 119 rural banks which have relatively greater potential risks and uses data from 2015 to 2019 to conduct an empirical test.
The main contributions of this paper are as follows. (1) A theoretical extension of the Freixas and Rochet (2008) model is used to deduce and prove the inhibitory effect of differential rates on bank risk-taking. (2) This paper discusses the impact and heterogeneity of the dynamic transition from a unified rate to a differential rate on bank risk-taking after the establishment of China's deposit insurance system, enriching the theoretical discussion. The differential rate mechanism significantly inhibits risk-taking by rural banks in China, and this inhibitory effect is more obvious for banks with less risk and more assets, whereas the effect on country banks is relatively insignificant. (3) This paper not only verifies the impact of a differential rate mechanism on bank risk-taking but also considers the effect of restructuring rural credit cooperatives on a selected sample of rural banks in a similar period. The results show that in the short term, the reform of rural credit cooperatives intensifies risk-taking of rural commercial banks, but the differential rate mechanism alleviates this negative effect to a certain extent.
According to the theoretical analysis and empirical results in this paper, the following policy implications are obtained: First, improving the design of the deposit insurance system can not only weaken the negative impact of the moral hazards inherent in the system but also increase its role in stabilizing the banking system. We should give full play to thePrompt Corrective Action of the deposit insurance system, which include monitoring and timely intervention, improve the effectiveness of the deposit insurance system in disposing of financial risks, reduce the cost of risk disposal and prevent the infection and diffusion of financial risks. Second, we should strengthen the risk early-warning mechanism and dynamic supervision of small and high-risk banks and require rectification when problems are found, to avoid the accumulation of risks.

Green finance serves green investment, which serves the green economy. In practice, there is a huge demand for funds to develop green finance and promote environmental protection. In addition, it is unsustainable to rely solely on government financial support. Therefore, an important solution for this problem is public-private partnerships (PPP), in which the government and enterprises work together. However, enterprises are not enthusiastic participants of pollution prevention, green, and low-carbon PPP projects because they generally experience problems such as high investment thresholds, competition homogeneity, and high market risk.
Although the direction of the new incentive method is clear, relying only on the traditional PPP contract framework is insufficient to manage the complex problems that arise when managing project portfolios. Thus, the contract model for traditional single-commercial PPP projects cannot be directly adopted. The key issues involved in the green PPP project portfolio are as follows: What elements must be considered when concluding the contract？ What coordination mechanism must be selected to ensure that the contract is signed？ Is there an optimal concession period for green PPP projects？ Is the green PPP project portfolio better than the traditional incentive mechanisms of direct government subsidies？ Exploring these issues will provide a good theoretical basis and technical support for the promotion and implementation of the combination of green PPP and high-yield projects.
This paper uses the net present value method to propose a decision-making model for the optimal concession period of green PPP project portfolios based on the win-win goal of economic and environmental benefits. Our model differs from those of the literature in three dimensions. First, we introduce environmental benefits and extend the optimal concession period model for a single PPP project to the green PPP project portfolio. The goals of combining green PPP and high-yield projects include social welfare, environmental benefits, consumer surplus, and economic profits of enterprises and the government. Second, we compare the different game modes between the government and the enterprises, demonstrate the existence of an equilibrium, reveal the internal logic and key determinants of the optimal concession period, and provide a basic framework for the contract design of the green PPP project portfolio. Third, through a scenario analysis, we show the superiority of the green PPP project portfolio over the traditional incentive mechanism of direct government subsidies. The results provide theoretical support for promoting the combination of green PPP and high-yield projects.
We obtain three important results. First, the combination of green PPP and high-yield projects can improve enterprise profits and stimulate social capital to participate in environmental governance and deal with environmental risks. Second, whether the government-enterprise contract can be signed successfully depends on the game decision-making mode. If the decision is made independently, although the concession period that maximizes enterprise profits can also achieve the highest environmental benefits, the game results are shown as “equilibrium on the edge” and it is difficult for both parties to enter into a contract. Therefore, it is necessary to study the behavioral restraint mechanism to promote coordination and cooperation between the government and enterprises. PPP stakeholders can then decide from a global optimal perspective and achieve a win-win situation of mutual economic profit and environmental protection. Third, compared with direct government subsidies, the combination of green PPP and high-yield projects not only increases consumer surplus and improves social welfare, but also copes better with the fisical burden. Therefore, policy guidance could be strengthened to manage the reasonable bundling of projects with strong correlation, upstream and downstream links, or adjacent sub-projects. Some direct government subsidies will gradually be replaced by the combination of green PPP and high-yield projects. The diversified funds can then be used to provide continuous support for environmental protection, achieve the goals of emission peak and carbon neutrality, and better serve the green economy and sustainable development.

In China, private enterprises occupy an important position. The Chinese government attaches great importance to the development of private enterprises and has introduced a series of measures including financial policies to encourage and support the development of private enterprises. In recent years, this development has encountered some difficulties, including frequent debt defaults. Between 2014 and 2021, bond market defaults became more frequent, with 339 corporate bonds in default, 74.6% of which were issued by private enterprises. This paper seeks to determine whether the main causes of private enterprises' debt default are internal factors or the external economic environment. Investigating this question has implications for how the government supports and guides private enterprises to overcome their difficulties, boost the economy, and achieve high-quality economic development.
To test whether private firms' debt default is driven by internal or external factors, this paper analyzes the impact of two important corporate behaviors on private firms' debt default, i.e., short-term loans for long-term investment (abbreviated as “SFLI” hereafter) and diversification. These two perspectives are chosen for two reasons. First, SFLI and diversification are important corporate decision-making behaviors in China. Diversification and SFLI are prevalent among private firms and have an impact on their value and risk. Second, SFLI and diversification can consistently influence firms' debt default from a theoretical perspective. On the one hand, the debt default of private enterprises may be mainly driven by internal factors. Internal factors refer to private entrepreneurs focusing on their face and enterprises blindly chasing expansion, causing private enterprises to default on their debts. Under this hypothesis, important decisions made by entrepreneurs such as SFLI and diversification are irrational and will increase their debt default. On the other hand, private enterprises' debt default may be mainly driven by external factors, i.e., the macroeconomic and institutional environment may be the main factor driving firms' debt default. Under this hypothesis, SFLI and diversification are the results of rational management decisions and will not increase firms' debt default.
Using a sample of Chinese listed private firms from 2003 to 2018, we find that both SFLI and diversification increase the likelihood of debt default for private firms, suggesting that internal factors or private entrepreneurs' own irrational decisions are the main cause of debt default. In terms of the transmission mechanism, SFLI and diversification lead to lower profitability, higher over-leverage, and higher agency costs, which in turn lead to debt default. In terms of heterogeneity, the credit crunch amplifies the effect of SFLI on private firms' debt default, while industrial support policies also increases this effect. Finally, diversification and SFLI by private enterprises do not always lead to default. This paper implies that in addition to guiding financial institutions to support private enterprises, given the cultural background and psychological characteristics of entrepreneurs, authorities should encourage private enterprises to implement high-quality development strategies to solve the debt default problem.
The marginal contributions of this paper are as follows. First, it extends research on private enterprises' debt problems. Most studies analyze private firms' debt problems from the perspective of banks (Brandt and Li, 2003), whereas this paper analyzes these problems from the perspective of firms' decision-making. Other studies focus on the liquidity risk and monitoring effects of SFLI (Diamond, 2004; Bharath et al., 2008), whereas this paper analyzes how SFLI affects private firms' debt default. Finally, the paper adds evidence to firm diversification and supports the value discount of diversification (e.g. Rajan et al., 2000) by investigating private enterprises' debt default.

Public-private partnerships (PPPs) help develop local infrastructure and public utilities and ease local governments' financial burden. Since 2014, a series of related policies published by the Chinese government have prompted many companies to participate in PPP projects. Analyzing the effects of PPP participation on companies' external financing is important, as external financing is still crucial to companies' development in China. This analysis also helps to improve PPP design, contain government debt risk, and attract private capital to public projects.
In a PPP, a government and a company jointly establish a special purpose vehicle (SPV) to finance public projects. Government subsidies and equity investment made by state-owned capital (called government equity participation) in SPVs are the two main ways in which the government engages in PPP projects. From a theoretical and empirical perspective, this paper explores and compares the impacts of these two forms of government engagement on PPP-participating companies' financing costs and leverage ratio. The results show that government equity participation increases companies' leverage ratio and reduces the interest rate of bank loans through government guarantees. However, government subsidies do not have such effects. These results help us understand the impact of PPP project participation on enterprise financing.
The main contributions of this paper are as follows. First, prior models consider subsidies as the only way in which the government participates in PPP projects. This paper introduces government equity participation in the model to make the theory more realistic. Second, this paper is the first to examine the effects of government subsidy and government equity participation on the external financing of listed companies participating in PPPs. Finally, this paper complements research on the relationship between government financing and enterprise financing.
In the theoretical section, this paper adopts a general equilibrium model with capital externality. The government and companies jointly set up an SPV, which receives a subsidy from the government and loans from financial intermediaries to purchase capital. Financial intermediaries must pay a cost to observe the borrower's realized return, corresponding to the “costly state verification” assumption in Bernanke et al. (1999). The results show that a higher government equity share in the SPV leads to a higher government guarantee obtained by the SPV, which induces a higher leverage ratio for the SPV. At the same time, the government guarantee means that financial intermediaries are more willing to issue loans and accept a lower loan rate. However, the government subsidy does not affect the loan contract and thus does not change the leverage ratio and loan rate. The effects on an SPV’s external financing will be transmitted to PPP-participating companies. In this way, government equity participation in the SPV will increase PPP-participating companies' leverage ratio and reduce their loan rates, but government subsidies will not change the two variables.
The empirical section verifies these theoretical results. Combining data from the China Public Private Partnerships Center with financial data from listed companies from 2010 to 2018 in the China Securities Markets and Accounting Research (CSMAR) database, we use PSM-DID analysis to get the results. We find that government equity participation significantly reduces the financing costs and increases the leverage ratio of PPP-participating companies, while government subsidies have no significant effects on both. In addition, government equity participation has a lower positive effect on the leverage ratio of state-owned enterprises than on that of non-state-owned enterprises. In regions with higher marketization, government equity participation has a lower positive effect on the leverage ratio and a lower negative effect on borrowing costs.
Our results have the following policy implications. First, when evaluating the effectiveness of government expenditure on PPP projects, we should distinguish between government subsidies and government equity participation. Second, as an SPV obtains a government guarantee from government equity participation, we should properly use government guarantees to prevent debt investment in the name of equity investment in PPP projects. A reasonable government guarantee helps expand investment in public services. However, overusing the government guarantee may lead to an excessively high leverage ratio and operational risk. In addition, it may increase government expenditure on PPP projects and thus increase fiscal pressure. Last, we should standardize the implementation of PPPs through special supervision and performance evaluation of PPP projects, and eliminate irregular behavior such as promising minimum returns to private partners.

The Housing Provident Fund (HPF) is an important institutional arrangement for providing housing to citizens. The efficient operation of the HPF system is important for implementing the strategic position that “houses are for living in, not for speculation”, improving residents' housing security, and enhancing people's sense of gain. However, narrow financing channels increase the pressure on the HPF’s liquidity as the HPF’s loan-to-deposit ratio rises. This restricts the HPF’s ability to meet households' credit demand for purchasing housing. HPF management agencies reduce credit risk and liquidity pressure by reducing loan amounts, increasing the down payment ratio for existing housing, and strictly controlling housing appraisal values and loan terms. All of this leads to a higher threshold for HPF loans than for commercial loans. In this context, it is necessary to study the factors and mechanisms that restrict the operational efficiency of the HPF system, which is crucial for reforming the HPF system, ensuring safe housing for citizens, and promoting high-quality economic development.
To this end, this paper first discusses how the HPF influences households' borrowing behavior and consumption under liquidity pressure by constructing a theoretical model, and then uses data from the 2013 and 2017 China Household Finance Surveys (CHFS) to construct a pooled cross-sectional regression model and empirically test the theoretical hypotheses. To correct for the estimation bias caused by omitted variables, we also use control dummy variables for the observation year, loan issue year, and regions, and further run a propensity score matching (PSM) model and two-stage least squares regression to alleviate endogeneity issues to identify the impact of borrowing constraints on the choice of housing loan, and the effect of the housing loan on the down payment ratio and participants' consumption. Research shows that, first, borrowing constraints decrease the probability of HPF participants using HPF loans by 33.85%. Second, liquidity pressure explains why HPF management agencies raise the application threshold for HPF loans, which reduces the probability of borrowing-constrained households getting HPF loans. On average, the down payment ratio of HPF loans is about 5% higher than that of commercial loans, and provinces with high HPF loan-to-deposit ratios have higher down payment requirements. Finally, households without HPF loans have an increased housing purchase burden, and their consumption of non-durable goods is significantly reduced. Households with HPF loans consume 10.83% more non-durable goods than households with commercial loans.
Our contributions to the literature are as follows. First, we use the perspective of the HPF system design to discuss the reasons for the system's inefficiency. Second, we use household-level microdata to identify the impact of liquidity pressure on the borrowing behavior of borrowing-constrained households. Finally, we focus on the difference between the effects of liquidity pressure on the borrowing behavior and consumption of HPF participants with different characteristics, avoiding the bias caused by the systematic difference between HPF participants and non-participants. It would be helpful to better evaluate the implementation efficiency of the HPF system.
We suggest that HPF management agencies should enhance their liquidity by revitalizing their existing credit assets. Reforming the HPF financing pattern will help decrease the threshold for HPF loans and increase the likelihood of participants obtaining HPF loans, which will help to promote fairness, reduce participants' burden, and boost consumption. In addition, it can provide investment products with high credit ratings for the capital market and alleviate the asset shortage caused by insufficient high-quality assets in the financial market. Moreover, the reform can provide liquidity support to companies to reduce their fees and burden. Especially during the COVID-19 pandemic, the reform can assist with the practical implementation of policies aimed at reducing the fees and burden of companies against HPF operational payments that are unbalanced due to the decline in HPF income during the fee reduction period. Consistent with the idea of “houses are for living in, not for speculation”, the reform can also help to ensure that the housing demand of low-and middle-income households is met, to fulfill the HPF’s role of improving housing security and ensuring the stable development of the property sector.

Studies of the relationship between informal institutions—especially culture—and corporate innovation are a hot topic in the cultural and industrial economics literature. However, scholars encounter the following problems. First, how can the cultural differences in different regions be measured？ Many sociologists believe that language is the main object of culture because it has the dual functions of creating society and improving cognition, while culture is an internally unified organic whole. Therefore, differences in dialects can be used to measure cultural differences. Second, how should the endogenous problem be solved？ We use dialect diversity to represent culture. Although the problem of reverse causality is not serious and can be quantified, there is no doubt that measurement errors exist. We begin with the perspective of dialect formation and choose the average terrain slope as the instrumental variable for dialect to ensure the credibility of our test results. Third, we identify the mechanism between dialect diversity and corporate innovation, which not only helps us understand how dialects (culture) affect enterprise innovation, but also allows us to make corresponding policy recommendations based on this mechanism. This maximizes the impact of culture on enterprise innovation.
Through our theoretical analysis, we consider dialect as a kind of identity. People who speak the same dialect often quickly remove their barriers to trust. In regions with more dialects, the probability of sharing an identity based on dialect is lower than in regions with fewer dialects, which has a negative impact on social trust. In enterprise management, innovation investments are characterized by high investment and high risk. Therefore, the lower the degree of trust, the higher the cost of communication and coordination in investors' decision making. In areas with more dialects, the increase in communication and coordination costs caused by the decline in social trust inhibits enterprises' innovative decision-making practices.
Second, from the perspective of enterprise innovation investment, innovation outsourcing is an important method for enterprises to improve their innovation capabilities and competitiveness. On the one hand, attempts at innovation outsourcing experience an information asymmetry between the outsourcing party and the contractor, with high related transaction costs. In this case, the cultural characteristics represented by dialect enable people who speak the same dialect to share the same information and cultural concepts, which helps reduce the information asymmetry between the two parties and their transaction costs. On the other hand, speaking the same dialect is also conducive to alleviating commercial disputes between the two parties, which also reduces transaction costs. Therefore, as the number of dialects increases, the transaction costs for enterprises' innovation outsourcing also increase. This causes a more prominent obstacle for enterprises' innovation outsourcing, which leads to a decline in their innovation investments.
Finally, enterprises' independent innovation carries high investment costs and high risk, which requires a large amount of human and material capital. In this case, dialect diversity has a significant inhibitory effect on the cross-regional flow of production factors and technologies, which leads to market segmentation between different dialects. According to Foellmi and Zweimüller's (2006) demand-induced innovations theory, market segmentation is detrimental to enterprise-level innovation activities.
We use the corporate innovation survey database and instrumental variable method to represent culture with dialects and empirically test the relationship between dialect diversity and corporate innovation. Dialect diversity shows a significant inhibitory effect on corporate innovation investments. On average, if the population-weighted dialect diversity index increases by 1%, the per capita private innovation investment in enterprises drops by 1.18%. We also find that the influence of dialect diversity on corporate innovation investment is mainly in the trust effect based on cultural identity rather than the cultural exchange effect. Moreover, dialect diversity increases the transaction costs in enterprises' innovation outsourcing process, which in turn significantly inhibits their innovation investments. Finally, dialect diversity strengthens the inhibitory effect on corporate innovation investments through market segmentation.
We contribute three findings to the literature. First, based on the unique “culture and innovation” scenario, we reveal that informal institutions possibly hinder economic growth. Second, the uniqueness of the mechanism not only helps us to understand how dialect diversity affects corporate innovation, but also helps to alleviate its negative effects on economic growth. Third, the literature shows that dialect diversity is not conducive to urban economic development, while we find that it is not conducive to corporate innovation. Innovation is the core factor in maintaining economic growth; therefore, our results provide micro-level evidence and explanations for these macro results.

Food safety is a great concern not only for human health, but also for social harmony, economic development, and national strength. The Chinese government adopts a double-track approach to enhance food safety: legislation and the continuous improvement of safety supervision. However, with the rapid development of food production technologies and constantly changing business models, food as a category of trust-product has been subjected to ever-increasing information asymmetry, which brings huge challenges for food safety supervision.
The capital market's short-selling mechanism provides a feasible channel for food safety supervision. Short sellers are informed traders with a superior ability to collect and process information. The participation of short sellers in the capital market greatly increases the probability of the discovery of inferior food. Producers of low-quality food may be seriously punished by short sellers through destroyed market value, increased financing costs, customs boycotts, and dismissal of managers. These threats provide a capital market channel to prevent companies from producing inferior food.
The effect of short-selling behavior on food quality does not stop at the short-sold firms, but also has a spillover effect in the form of chain synergy, peer effects, and reduced information asymmetry, which may also increase the overall food quality around the short-sold firms.
We manually collect more than one million food sampling test results provided by the former China Food and Drug Administration from 2015-2018 and examine the impact of food firms' short-selling on the quality of food produced by short-sold target firms in addition to the quality of food produced by the target firms' headquarter regions. We use the annual average of the proportion of short-sold securities to measure a firm's short-selling pressure. If there are multiple food firms from the same regionlisted on the stock market that are subject to short-selling pressure, we use the weighted average proportion of the market value as a measure of the short-selling pressure for the region.
The former China Food and Drug Administration's food safety test results are classified by the sample year and by the regions where the food producers headquartered, but not by the inspecton regions. For each region-year or firm-year, we divide the number of qualified samples by the total number of tests as our proxy for food quality for the underlying region or firm for a given year.
After controlling for a number of region-specific cofactors, including the number of listed firms, legal environment, per capita GDP, quality of human resources, financial constraints in the region, industrialization stage (proxied by industry contributions to total GDP), and technology expenditure in our base model, we find that short selling has a significantly positive effect on regional food quality. Our firm-level regressions also show positive but marginal significant results for short selling on the target firms' food quality. Given the small sample and mostly very high qualification rate, the firm-level results are consistent with our expectations.
A heterogeneity analysis shows that this spillover effect is more prominent in regions with underdeveloped factor markets and relatively weak legal protection, in addition to underdeveloped regions. This result shows that short selling can be used as a supplementary mechanism to formal government supervision to improve food quality.
We address possible endogeneity issues through two approaches: matched comparison and instrumental variables. For the matched comparison, we use 132 region-year observations that are subject to short-selling pressure. We use the proportion of shares held by exchange traded funds (ETFs) for each short-sold food producer as the instrumental variable for short-selling pressure. First, ETFs are mostly tracking funds and their compositions are determined by the weight of certain indexes. Those managers seldom interfere with firm management and thus are exogenous to their firms' behaviors. Second, ETFs provide an important financial supply for short-selling behavior. Thus, the proportion of ETF shares is positively correlated with short-selling pressure. Following these two approaches, we still find a significantly positive effect of short-selling behavior on food quality.
The former possible policy implications of this study show that short selling in the capital markets can act as a governance role to enhance food quality for shorted firms, but also have an important spillover effect that may increase food quality in the firms' surrounding regions. We suggest that the government allows more food firms listed on the stock market can be short.

As non-executive employees play an increasingly important role in modern enterprises' technological innovation, long-term incentive plans should cover them in addition to management teams. China Securities Regulatory Commission promulgated the Measures for the Administration of the Equity Incentives of Listed Companies (Trial Implementation) (hereafter “Equity Incentive Measures”) in 2005 and revised it several times thereafter. The Equity Incentive Measures allow listed companies in China to grant performance-vested shares, options, and other long-term stock-based incentives to both executives and non-executive employees in their equity incentive plans. The Equity Incentive Measures also set out restriction rules regarding, among others, who should be granted stock-based incentives and how to price shares. Do these rules affect the effect of stock-based incentive plans, and if so, do they strengthen or weaken the effect？ Is the effect different between top executives and non-executive employees？ These questions require more attention. Unfortunately, most studies investigate the effect of equity incentives for top executives, while few explore the effect of stock-based incentives for non-executive employees and the related restriction rules.
This paper investigates the restriction rule regarding who should be granted stock-based incentives and the effect of this restriction on the efficiency of stock-based incentive plans. In China, non-executive employees were added on the stock-based incentive list for the first time by the Equity Incentive Measures, but they are confined to a critical minority, such as core business employees, key technical employees, and other important employees that listed companies identify discretionarily. Thus, employees are divided into incentivized and non-incentivized employees according to the rule and have completely different rights to share the returns of innovation success. This unintentionally increases the income gap between internal employees. Considering the specific practice in China, this paper develops two hypotheses regarding the effect of non-executive employee stock-based incentive plans on corporate innovation. The efficiency hypothesis posits that stock-based incentive plans motivate the rank and file to work hard by mitigating the agency problem, and hence improve the efficiency of corporate innovation. In contrast, the inequity hypothesis stresses that the conflict of interest caused by unequal pay between incentivized and non-incentivized employees weakens the positive effect of stock-based incentive plans.
Using annual data on the stock-based incentive plans and patents of Chinese listed companies from 2006 to 2017, this paper examines the above two hypotheses. We find that, overall, stock-based incentive plans significantly promote corporate innovation, but this overall effect is weakened by the passive participation of non-incentivized employees. This effect is generally smaller in SOEs and companies with a smaller income gap between incentivized and non-incentivized employees, and it disappears in companies with many employees covered by stock-based incentive plans. Therefore, properly improving the coverage of non-executive employeeswill help prevent unequal remuneration due to the incentive mismatch and improve the overall efficiency of stock-based incentive plans in China's stock market.
This paper contributes to the literature in two ways. First, based on China's specific practice and policies, this paper introduces equity theory to develop an inequity hypothesis of non-executive employee stock-based incentive plans to explain the potential effect of such plans on corporate innovation, adding a new explanation from the perspective of equity theory in addition to agency theory. Second, this paper demonstrates that the effect of stock-based incentive plans on corporate innovation is different for top executives and non-executive employees even if they are both granted shares under such plans. This is a significant advance in the literature that investigates the effect of equity incentive plans and is constructive for optimizing listed companies' stock-based incentive policies in China.

Over the last decade, the Chinese mutual fund market has grown enormously. However, compared with the developed mutual fund market, Chinese mutual funds are still relatively small and have much more room for development. Thus, it is worth asking whether a fund's size can expand indefinitely or should be restricted. In addition, previous studies have several limitations. First, the optimal mutual fund size calculated in the literature is mostly the optimal size for investors, rather than fund managers. Second, only a few papers study the optimal size for fund managers, but they fail to consider that the continuous expansion of fund size may lead to large-scale redemption by investors due to the diminishing marginal returns to scale, which makes the optimal size for fund managers impossible to achieve in practice. Third, this paper shows that principal-agent conflict, diminishing marginal returns, and large-scale redemption exist objectively in the fund market, and play a role in determining fund size. However, in the literature so far, the impacts of these constraints have not been included in the determination of optimal fund size.
In view of the above problems and the limitations of research, this paper finds that fund size cannot be expanded indefinitely due to diminishing marginal returns to scale in the fund market. Based on the three identified constraints (principal-agent conflict, diminishing marginal returns to scale, and redemption of investors), this study proposes the concept of a proper fund size interval. It also improves the classical Berk and Green model (BG model) and proposes a theoretical model of the proper fund size interval and its evaluation index. Determining the proper fund size interval is practically relevant, because it takes into account the interests of both investors and fund managers and the market constraints on fund size. This paper also develops a method for determining whether the fund size matches its managers' ability. The evaluation index of proper fund size constructed in this paper can effectively identify and judge oversized funds, funds with the proper size, and undersized funds. Using Chinese stock and hybrid funds between 2011 and 2019 as a sample, this paper empirically examines the appropriateness of fund size. The main conclusions are as follows.
First, we find that the average size of Chinese mutual funds is generally too large from 2011 to 2015, is appropriate from 2016 to 2018, and is too small in 2019. There is a significant negative relationship between fund performance and fund size, which indicates the existence of diminishing marginal returns to scale in the fund market. In the long run, the average net excess return tends to approach zero, and the probability of large-scale redemption of the fund with a nonnegative net excess return is far less than that of the fund with a negative net excess return.
Second, as the market impact cost decreases annually, the upper bound and lower bound of the proper size interval are also decreasing, whereas the width of the proper size interval is increasing. The reason is that the upper and lower bounds of the proper size interval are influenced by managers' ability and impact cost, and the width of the proper size interval is only influenced by the impact cost.
Third, the performance of funds with the proper size is much better than that of oversized and undersized funds. The net excess return of oversized funds is negative.
Fourth, the proportion of undersized funds is the largest and increases with each passing year. Due to the rapid growth in the number of start-up funds, and the relatively slow growth in the number of funds with the proper size, the proportion of oversized funds is the second largest and is decreasing annually. However, the proportion of funds with the proper size is the smallest.
In summary, funds with the proper size have better fund performance and fund flow. Therefore, for fund companies to increase the market share of funds with the proper size, they should constantly harness the latent potential of fund managers and keep improving their ability. At the same time, fund managers should be given timely payoff incentives, to match their ability and the fund performance. Regulators should continue to rapidly improve the evaluation system of the fund industry. Rather than paying attention only to fund performance, they should also consider investors' investment interests and evaluate the appropriateness of the fund size and fund managers' ability.