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Investment subsidies, cost externalization and risk externalization--The formation mechanism of overcapacity during economy system transformationThis paper explain how the defect of economy system of china and the unhealthycompetition of local government lead to the formation of redundant construction and excesscapacity: the fiscal decentralization system of china and the promotion system of governmentofficer based on the growth of GDP result in the competition of capital inflow, so there isa strong motive forces local government to intervene enterprises' investment and issue manypreferential policies. Ambiguously defined property rights of land, the seriously defect ofenvironment protection and the problem of the soft-restrict of financial institution makelocal government take the ways of underselling industry land, sacrificing environment andhelping enterprises to obtain financial resources as important means for this competition.The investment subsidies effect caused by local government’s behavior of underselling land,The cost externalization effect caused by their behavior of sacrifing environment, and theseriously risk externalization effect caused by the low own funds of enterprises which isthe result of the local government’s behavior of underselling land and supporting loan,distort enterprises’ investment behavior, lead to excess investment of capacity, theredundant construction in an industry and over-capacity. According to the result of thispaper, in order to settle the problem of redundant construction and over-capacity, we shouldpromote reformation in the field of land property right, environment protection mechanism,financial system, fiscal system and the promotion system of local government officer.Keywords: over-capacity, investment subsidies, cost externalization, riskexternalization