Collusions between Governments and Firms and Economic Development

We argue that it is the collusion between local governments and firms that leads to both high rates of economic growth and accidents in China. We investigate the optimal collusion-proof contract. Under this contract, local governments and firms obtain informational rents. Below some critical value, damage compensations have a partial substituting effect for supervision and punishment. In reality, collusions may exist due to problems such as high costs to prevent collusion, the myopia of local governments, and the lack of credibility of punishment.