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Abstract:
This paper examines the extent to which agency theory may explain CEO compensation in state-owned enterprises (SOEs) in China during the 1980s. We find that the sensitivity of CEO pay to firm performance decreases with the variance of performance. This is consistent with the prediction of a tradeoff between incentives and insurance in agency theory. On the other hand, the data lend little support to the relative performance evaluation hypothesis. We also find that the performance sensitivity of CEO pay increases with the marginal return to executive action, that is, pay sensitivity increases with managerial control rights, worker incentives, profit retention rates of firms, and the degree of product market competition faced by the firm. While the elasticity of pay to sales is slightly smaller than that found in the literature on conventional firms in the West generally, our estimate of the semi-elasticity of pay with respect to profitability is comparable to estimates for regulated industries in the United States.

CEO compensation, agency theory, relative performance model, SOEs, China

Abstract:
Public listing is a key and unique reform measure for large state-owned enterprises (SOEs) in China. Using a panel data set that contains both pre- and post-listing financial and ownership information on publicly listed firms in Shanghai and Shenzhen Stock Exchanges, we explore the effects of public listing in China. We find that using public listings as a means to reform SOEs has not worked wonders: company performance in the post-listing years are sharply lower than their levels in both the pre-listing years and the initial public offering years. Moreover, the effects of public listing on performance are not significantly affected by the percentage of state shares or of the total shares held by top shareholders.

state-owned enterprises, public listing, corporatization, reform, China

Abstract:
Using a comprehensive country-level panel data set covering the period from 1990 to 2001, we investigate the impact of privatization and competition in the telecommunications sector around the world. Full privatization, which gave private owners control rights, contributed substantially to improving allocation of labor and capital, expanding service output and network penetration, and improving labor and total factor productivities. But partial privatization, which retained the state's control rights, showed no significant impact. The increase in competitive pressure contributed substantially to growth in the sector by raising both factor inputs and total factor productivity. We also found evidence of complementarity between privatization and competition in deepening network penetration and in restraining the rise of service pricing among privatized operators. Our results are robust to plausible alternative specifications.

Abstract:
Using a comprehensive country-level panel data set covering the period from 1981 to 1998, we examine the impact of privatization and competition in the telecommunications sector around the world. Privatization contributed substantially to labor shedding, output growth, network expansion, and improvements in labor productivity as well as total factor productivity. But how countries privatized is important. On the one hand, share-issue
privatization facilitated the development of the mobile market segment. Granting a newly privatized operator a period of exclusive market access, on the other hand, reduced the gains from privatization (owing to the output-restricting tendency associated with market power) but did not entirely negate them. The presence of competitive pressure in the market was associated with more employment, higher output, faster network expansion, and higher labor and total factor productivity. We find evidence of complementarity between privatization and competition in that competition increased the gains from privatization and vice versa. Our estimates show that half of the output growth between 1990 and 1998 was attributable to privatization and competition, after controlling for input growth. Competition appeared to have a larger impact on labor and total factor productivity than did privatization.

Privatization, Competition, Telecommunications, Reforms, Cross-country

Abstract:
Using data from a recent national survey on the ownership reform of state-owned enterprises in China, we study the effects of reducing politician control and agency problems on the financial performance of the reformed firms. Taking into account the endogenous nature of the reforms, we find that firm performance is positively affected by the lessening of politician control by increasing the firm's flexibility in labor deployment and by the mitigation of agency costs through the introduction of more effective corporate governance mechanisms such as one-share one-vote and shareholding-based board structure composition. Ownership structure also affects performance: relative to shareholding by the state, foreign ownership has a positive effect on firm performance; individual (mostly employee) shareholding has a negative effect; whereas the effect of collective and legal person shareholding is indistinguishable from that of state shareholding. Somewhat surprisingly, operating autonomy (excluding labor deployment flexibility) has a negative effect on firm performance, suggesting serious agency problems in the reformed enterprises.

SOE reform, corporatization, corporate governance, ownership

Abstract:
Infrastructure industries - including telecommunications, electricity, water, and gas - underwent massive structural changes in the 1990s. During that decade, hundreds of privatization transactions valued at billions of dollars were completed in these sectors in developing and transition economies. While privatization has received the most attention, reforms also included market liberalization, structural changes like unbundling, and the introduction of new laws and regulations. To date, regulations have received far less attention than their potential economic effects warrant, largely due to lack of data. In order to address this problem, the authors set out to compile a comprehensive and consistent dataset through an extensive survey of telecommunications and electricity regulators in developing countries. The authors describe the surveys and the resulting database. The database of telecommunications regulations includes 178 variables on regulatory governance and content in 45 countries. The database of electricity regulations includes 374 variables in 20 countries.

This paper - a product of Investment Climate, Development Research Group - is part of a larger effort in the group to understand regulatory and infrastructure reforms.

Abstract:
This report is based on an investment climate survey conducted in 2002 in five Chinese cities (Beijing, Chengdu, Guangzhou, Shanghai, and Tianjin), and a follow-up survey conducted in 2003 in 18 cities. This project is part of a larger effort in the World Bank Group to help countries assess their investment climates and to identify reforms that will lead to higher productivity, more efficient investment, and ultimately more job creation and growth.

Abstract:
Over the past few years, many studies have looked at the macroeconomic, cultural, and institutional determinants of corruption. This study complements these cross-country studies by focusing on microeconomic factors that affect bribes paid in a single sector of the economy. Using enterprise-level data on bribes paid to utilities in 21 transition economies in Easter Europe and Central Asia, Clarke and Xu look at how characteristics of the firms paying bribes (such as ownership, profitability, and size) and characteristics of the utilities taking bribes (such as competition and utility capacity) affect the equilibrium level of corruption in the sector. On the side of bribe payers, enterprises that are more profitable, enterprises that have greater overdue payment to utilities, and de novo private firms pay higher bribes. On the side of bribe takers, bribes paid to utilities are higher in countries with greater constraints on utility capacity, lower levels of competition in the utility sector, and where utilities are state-owned. Bribes in the utility sector are also correlated with many of the macroeconomic and political factors that previous studies have found to affect the overall level of corruption.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to understand the economic impact of privatization and competition in network utilities. The authors may be contacted at gclarke@worldbank.org or lxu1@worldbank.org.

Abstract:
Johnson, McMillan and Woodruff (2002) examine the relative importance of property rights and external finance in several Eastern European countries, and find property rights to be overwhelmingly important, while external finance explains very little of firm reinvestment. McMillan and Woodruff (2002) further conjecture that as transition moves along, market-supporting (financial) institutions should become more important. This paper re-examines these issues in the context of China in 2002, a point at which the transition had moved quite far. We also find that secure property rights are a significant predictor of firm reinvestment. However, in line with the McMillan-Woodruff conjecture, we find that access to external finance in the form of bank loans is also associated with more reinvestment. Following Acemoglu and Johnson (2003) we separate our proxies for the security of property rights into two groups: those measuring the risk of expropriation by the government and those measuring the ease and reliability of contract enforcement. Whereas those authors' cross-country results suggest that risk of expropriation is the more severe impediment to economic development, ours indicate that both expropriation risk and contract enforcement play a role in Chinese firms' reinvestment decisions. We also find that another aspect of property rights, the extent of private ownership is associated with greater reinvestment. At China's current stage of development, it appears that expropriation risk, contract enforcement, access to finance, and ownership structure all matter for reinvestment decisions. There is also some evidence that access to finance and government expropriation affect small firms more than large ones.

institutions, ownership, finance, china, investment, firms

Abstract:
Weak institutions ought to deter foreign direction investment (FDI), and mass media stories highlight China's institutional deficiencies, yet China is now one of the world's largest FDI destinations. This incongruity characterizes China's paradoxical growth. Cross-country regressions show that China's FDI inflow is not exceptionally large, given the quality of its institutions and its economic track record. Institutions clearly determine a country's allure as an FDI destination, but standard measures of institutional quality can be problematic for countries undergoing rapid institutional development, and can usefully be augmented by economic track record measures. Deng Xiaoping's 1993 southern tour heralded sweeping reforms, and this regime shift is insufficiently reflected in commonly used measures of institutional quality. China's FDI inflow surge after these reforms resembles similar post-regime shift surges in the East Bloc, and so is also unexceptional. Recent arguments that China's FDI inflow is inefficiently large because weak institutions deter domestic investment while special initiatives attract FDI are thus either unsupported or not unique to China.

institutions, FDI, China, growth, governance

Abstract:
Although theoretical models make distinct predictions about the relation between finance and income inequality, little empirical research has been conducted to compare their relative explanatory power. We examine the relation between financial intermediary development and income inequality in a panel data set of 91 countries for the period of 1960-95. Our results provide reasonably strong evidence that inequality decreases as economies develop their financial intermediaries, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993). Moreover, consistent with the insight of Kuznets, the relation between the Gini coefficient and financial intermediary development depends on the sectoral structure of the economy: a larger modern sector is associated with a smaller drop in the Gini coefficient for the same level of financial intermediary development. However, there is no evidence of an inverted-U shaped relation between financial sector development and income inequality, as suggested by Greenwood and Jovanovic (1990). The results are robust to controlling for biases introduced by simultaneity.

Income inequality, financial intermediary development, Kuznets curve

Abstract:
Many recent studies have looked at the macroeconomic, cultural and institutional determinants of corruption at the cross-national level. This study complements these existing cross-country studies by focusing on firm-level evidence of microeconomic factors affecting bribes paid in a single sector of the economy. Using enterprise-level data on bribes paid to utilities in 21 transition economies in Eastern Europe and Central Asia, we examine how characteristics of the utilities taking bribes and the firms paying bribes affect the equilibrium level of corruption in the sector. Bribe takers (utility employees) are more likely to take bribes in countries with greater constraints on utility capacity, lower levels of competition in the utility sector, and where utilities are state-owned. Bribe payers (enterprises) are more likely to pay bribes when they are more profitable, have greater overdue payment to utilities, and are de novo private firms. A thorny issue in the empirical literature on corruption is how to distinguish between the "endogenous harassment" and "speed money" theories of corruption. The former receives stronger support from some of the results than the latter.

Corruption, Bribes, Ownership, Competition and Privatization

Abstract:
The importance of a country's "investment climate" for economic growth has recently received much attention. A contribution of this paper is to address the general lack of appropriate data for measuring the investment climate and its effects. In this paper we use a new survey of 1500 Chinese enterprises in five cities to more precisely define and measure components of the investment climate, highlight the importance of firm-level data for rigorous analysis of the investment climate, and investigate empirically the effects of this comprehensive set of measures on firm performance in China. Overall, our firm-level analysis reveals that the main determinants of firm performance in China are international integration, entry and exit, labor market issues, technology use, and access to external finance.

Abstract:
China is now the world's largest destination of foreign direct investment (FDI), despite assessments highlighting its institutional deficiencies. But this FDI inflow corresponds closely to predicted FDI flows into China from a model that predicts FDI inflow based on government quality indicators and controls and is estimated across a sample of other weak-institution countries. The only real discrepancy is that, if government quality is measured by constraints on executive power, China receives somewhat more FDI than the model predicts. This might reflect an underestimation of the strength of these constraints in China, a unique institutional setting for FDI operations, FDI based on expected future institutional improvements, or a unique Chinese model of development. The authors conclude that Ockham's razor disfavors the last. They also note that FDI may be elevated because Chinese institutions protect foreign firms better than domestic ones.

Foreign Direct Investment, Economic Theory & Research, Legal Products, Investment and Investment Climate, Parliamentary Government

Abstract:
China is now the world's largest destination of FDI, despite assessments highlighting its institutional deficiencies. But this FDI inflow corresponds closely to predicted FDI flows into China from a model that predicts FDI inflow based on government quality indicators and controls and is estimated across a sample of other weak-institution countries. The only real discrepancy is that, if government quality is measured by constraints on executive power, China receives somewhat more FDI than the model predicts. This might reflect an underestimation of the strength of these constraints in China, a unique institutional setting for FDI operations, FDI based on expected future institutional improvements, or a unique Chinese model of development. We conclude that Ockham's razor disfavors the last. We also note that, FDI may be elevated because Chinese institutions protected foreign firms better than domestic ones.

FDI, China, institutions, growth

Abstract:
The multitask agency theory argues that incentive devices for the agent need to be viewed as a system to induce balanced allocation of effort among the tasks. This important insight has not been incorporated into the empirical study of CEO compensation. Since there can be several measures for each of a CEO's tasks, incentive devices based on these measures can be complements or substitutes. However, the existing empirical literature on multitask agency only considers complementarity. This paper studies the complementarity and substitutability theoretically and empirically. Our empirical findings, based on a panel data set of CEO contracts from more than 300 state-owned enterprises in China, support most of the theoretical predictions. Our evidence also suggests that profits are not the only objective of the principal (the Chinese government) in designing CEO contracts. Our findings about the determinants of the incentive devices offer support to some notions in agency theory and the literature on incomplete contracts.

CEO compensation, agency theory, multitask, complementarity, managerial discretion, state-owned enterprises

Abstract:
Entertainment and Travel Costs (ETC), an expenditure item in standard accounting books of firms in China, amount to about 20% of total wage bills in a sample of 3470 Chinese firms. Using a detailed dataset of these firms, we analyze the composition of ETC and effects of ETC on firm performance. We develop a simple model of managerial decisions on the amount of entertainment expenditures to spend on strengthening relational capital with suppliers and clients, bribing government officials, and private consumption. This model allows us to identify components of ETC by examining how they should respond to different environmental variables. We find strong evidence that firms' ETC compromise a mix that includes expenditures on government officials both as "grease money" and "protection money," expenditures to build relational capital with suppliers and clients, and managerial private consumption. Overall, ETC have significantly negative effects on firm performance, but their negative effects can be much less pronounced when their marginal returns are higher, particularly, under severe government expropriation and when the quality of government service is very poor.

Corruption, Firm performance, Government Expropriation, Corporate Governance

Abstract:
Using a large panel dataset of Chinese industrial firms, the authors examine the determinants of access to loans from formal financial intermediaries and extension of trade credit. Poorly performing state-owned enterprises were more likely to redistribute credit to firms with less privileged access to loans through trade credit, a pattern consistent with some of the extension of trade credit being involuntary. By contrast, profitable private domestic firms were more likely to extend trade credit than unprofitable ones. Trade credit likely provided a substitute for loans for these private firms' customers that were shut out of formal credit markets. As biases in lending became less severe, the amount of trade credit extended by private firms declined.

Investment and Investment Climate, Economic Theory & Research, Banks & Banking Reform, Financial Crisis Management & Restructuring, Financial Intermediation

Abstract:
That Lima's water system was in near-crisis was not enough to bring about radical change. Partial reforms to reduce many of the city's worst problems were carried out under public management. But a quarter of Lima's citizens still had no access to water or sewerage connections, extended service interruptions were common, and more than a third of the scarce water supply was wasted. Why did the push for privatized water and sanitation fail?

The main reason Lima failed to implement a concession was geographical: the scarcity of water sources meant high marginal costs, partly for pumping water from deep wells and building adequate storage for dry periods. High extraction costs were compounded by years of neglect; much of the system needed to be replaced. Attracting private investors meant setting prices high enough to recover these high costs and provide a reasonable return on capital.

But the government had subsidized costs for years, so a concession would have required a sharp and sudden price increase to cover marginal costs. Moreover, any forward-looking investor would want to slow the pace of future investment by curbing demand through more effective (meter-based) bill collection. And cross-subsidies, which reduce the incentive to conserve water, would also have to be reduced.

The ultimate cause of the concession's failure was geographical but the proximate cause was political. Privatizing a utility is politically tricky if it involves higher prices and the controversial ceding of monopoly powers to private parties, especially foreigners. Private participation in water is further hampered by the social importance of water and by the lack of international experience and the technical difficulties in designing privatization reform in the sector. At the same time, water offers fewer benefits than other utilities - few revenues to reward supporters or compensate losers - and the price increases likely in Peru would especially hurt the urban poor, who were important to the president's support base. After a favorable start, the political equation shifted against privatization.

The concession's failure was costly, in access goals not fully met, in adverse effects on health, and in the failure to curb consumption through metering - and hence in continued depletion of the aquifer and its increasing contamination by ocean salt.

Peru's institutional weaknesses, especially its lack of an autonomous judiciary, might have limited how much could have been achieved. But considering the net gains from private operation in the much weaker institutional settings in Africa, Lima would probably have been better off with a concession.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to study the political economy of infrastructure reform. The study was funded by the Bank's Research Support Budget under the research project "Regulating Water Supply."

Abstract:
Written performance contracts, widely touted as a way to help state-owned enterprises improve performance, seem to fail. Why? Because information asymmetry, lack of government commitment, and lack of managerial commitment lead to weak incentives and shirking.

Shirley and Xu analyze experience with written performance contracts between developing country governments and the managers of their state-owned enterprises. Such contracts have been a vogue since the mid-1980s, and substantial resources have been sunk into their design and enforcement, yet the few assessments to date show mixed results.

Using a simple agency model, they identify how problems of weak incentives stemming from information asymmetry, lack of government commitment, and lack of managerial commitment can lead to shirking.

They apply the model to a sample of 12 contracts with monopoly enterprises in six developing countries (Ghana, India, the Republic of Korea, Mexico, the Philippines, and Senegal). All suffer from serious contracting problems. They find no pattern of improved performance that can be attributed to the contracts.

Only three of the 12 case-study companies showed a turnaround in total factor productivity after contracts were introduced, six continued past trends, and three performed substantially worse under contracts than they had before. Labor productivity improved at a faster pace in four cases, and deteriorated in none, but the improvement predated the contract.

Performance contracting assumes that government's objectives can be maximized, and performance improved, by setting targets that take into account the constraints placed on managers. For this to occur, the principals must be willing to explicitly state their objectives, assign to them priorities and weights, translate them into performance improvement targets, provide incentives to meet those targets (or monitor the agents without incurring significant costs), and credibly signal their commitment to the contract. These conditions failed to materialize.

Why would governments adopt contracts to which they were not committed or that were politically unrealistic? Sometimes because it enabled them to get foreign assistance.

How explain the managers' lack of commitment? Not surprisingly, managers with information advantages and bargaining power, and with no strong incentives or commitment from the government, used their advantages to manipulate the targets so as to ensure that their performance would be judged satisfactory.

Shirley and Xu outline the conditions under which performance contracts might succeed in improving performance.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to analyze the role of institutions and incentives in public sector management, as well as in the private sector. The study was funded by the Bank's Research Support Budget under the research project The Changing Role of the State (RPO 678-69).

Abstract:
In moving toward a more market-oriented system, how did China's government and state enterprises partition control rights, incentives, and financial arrangements? In 1980, China's government owned and controlled its state enterprises, which were managed (inefficiently) by bureaucrats. During the 1980s, the government experimented with decentralizing state enterprises to boost productivity. By decade's end, China's state enterprises had become more market-oriented, and the structure of enterprise property rights had changed dramatically. One factor in the move toward a more market-oriented system was the use of performance contracts with incentive components to govern state enterprises.

Xu examines how China's government and state enterprises partitioned property rights - how the government and enterprises decided about incentives, financial arrangements, and control rights. Xu assumes that the government is risk-neutral and the enterprise manager is risk-averse; that the government's goal is to increase revenue (or profitability), to retain maximum control of the firms, and to reduce the inequality of income across firms (by bailing out firms in financial trouble and collective heavier taxes on high-performing firms). The enterprise manager and employees, on the other hand, have an informational advantage over the government that allows them to earn a rent; that advantage leads to suboptimal efforts.
Among Xu's findings:

The government, in striving for equality, rewards inefficient firms while penalizing efficient ones (the so-called ratchet effect). Efficient firms are unwilling to reveal their true efficiency. They pretend to be inefficient by slacking, so they can get more transfers. There are inherent conflicts between two of the government's goals: Profitability and equality. And the government's desire to control state enterprises prevents many of them from becoming decentralized and improving their productivity.

Capital-intensive firms depend more on bank loans and less on retained profits, probably reflecting both their greater need for capital and the banks' role in allocating investment funds.

Larger firms rely more heavily on the government for investment, their managers have more autonomy, yet the firms are easier to control (it's easier to monitor 100 employees in one firm than to monitor one employee each in 100 firms).

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand state-owned enterprise reforms and government behavior.

Abstract:
Recently researchers have shown strong interests in regional protectionism in China. Due to data limitations, researchers usually have to reply on aggregate data on trade and prices at provincial levels, and often have to focus on particular industries. As a result, they have not been able to reach consensus as to the trends and damage of regional protectionism. Using a new data set specifically addressing the question of regional protectionism, we find that regional protectionism has significantly declined over time. It differs significantly across provinces and across industries, with tobacco and beverage (including alcohol) industries being harmed the most. There is also some evidence that the poor inland region has been hampered the most by regional protectionism. The gains from removing regional protectionism are economically significant (4-9% of total revenue of a typical firm). We also provide evidence that the share of export to other provinces by firms is positively related to a reduction in regional protectionism, higher relative prices in the other provinces, and the relative attractiveness of the business environment of the other provinces.

Protectinalism, China, market

Abstract:
Little is known about the magnitude of China's SOE labor redundancy and the patterns and determinants of job creation. Such knowledge gap makes it difficult for decision-makers to provide prescriptions for China's labor problems. This paper uses a panel data of Chinese provinces between 1986 to 1996 to estimate China's SOE labor redundancy, and patterns and determinants of job creation in China. We find that (i) releasing all redundant workers would raise the average urban unemployment rate to 25 percent; (ii) SOE labor redundancy proved to be a major impediment of job creation; (iii) patterns of job creation performance were mainly explained by structural variables such as SOE labor redundancy, schooling, railway mileage, and distance to seaport; and (iv) demand variables such as GDP growth rates, trade exposure and FDI inflow, in contrast, did not explain much.

China, Asia, state-owned enterprises, labor redundancy, unemployment, job creation

Abstract:
Why did reform in Santiago improve water system performance, when similar reform attempts under public management in other countries failed? In the late 1980s, Chile planned to privatize Santiago's sanitary works enterprise (EMOS) but instead reformed it under public ownership. It did so through a regulatory framework that mimicked the design of a concession with a private utility, setting tariffs that ensured at least a 7 percent return on assets, creating a neutral regulator independent of ministry intervention, and giving EMOS the right to appeal the regulator's tariff decisions.

This reform of Santiago's water system is often cited as a case of successful reform under public management. Comparing a comprehensive measure of welfare with a counterfactual example, Shirley, Xu, and Zuluaga show surprisingly large gains from Santiago's reform, given the relatively good initial conditions. (The gains accrued largely to government and employees, but consumers benefited from improved service and coverage.)

Why did reform in Santiago improve water system performance, when similar reform attempts under public management in other countries failed?

Chile has a long tradition of private water rights, shaped by early recognition that water is a scarce and tradable private good.

The reformed regulatory framework was designed to attract private investors to the water system and to motivate them to operate efficiently and expand the system.

Chile's unique electoral institutions sustained this framework under state operation after democracy was restored.

Chile's strong bureaucratic norms and institutions (permitting little corruption), combined with Santiago's relatively low-cost water system, permitted prices that effectively increased quasi-rents for investing in the system while minimizing the risk of inefficiency or monopoly rents. The authors also address the question of why EMOS was reformed but not privatized, and what the costs of not privatizing were. The system was privatized in 1999, but the changes from privatization are likely to be less significant than those introduced in 1989-90.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to draw lessons from regulatory reform and understand political and institutional change. This study was funded by the Bank's Research Support Budget under the research project Competition and Privatization in Urban Water Supply (RPO 682-64).

Abstract:
On average, performance contracts do not improve productivity in China's state enterprises and may even reduce it. But when they contain all the right features-managerial bonds, profit orientation, higher wage elasticity, and lower markup ratios-performance contracts can boost a firm's productivity growth rate by an estimated 10 percent. Performance contracts are widely used to reform state-owned enterprises. By June 1994, there were 565 such contracts in 32 developing countries, used principally to reform large utilities and other monopolies, and roughly another 103,000 in China, where they are also used to reform state manufacturing enterprises.

A performance contract is a written agreement between the manager of a state enterprise (who promises to achieve specific targets in a certain time frame) and government (which usually promises to award achievement with a bonus or other incentive). Performance contracts are a variant of the pay-for-performance or incentive contracts often used to motivate managers in the private sector. In the public sector, they are viewed as a device to reveal information and motivate managers to exert effort. Shirley and Xu analyze China's experience with performance contracts in more than 400 state enterprises. China is a good place for such a study because no country has ever used them on such a scale or with such a variety of enterprises (mostly in the competitive sector). China also uses many different kinds of contracts, with different targets (more profit-, tax-, or output-oriented). Shirley and Xu find that performance contracts

On average, do not improve productivity in China`s state enterprises and may even reduce it.

Are ineffective in competitive firms as well as monopolies.

Do more harm when they provide only weak incentives and when they do not reduce information asymmetry.

They find no connection between variables for commitment and the effects of performance contracts. Design matters. When performance contracts contain all the good features-profit orientation, higher wage elasticity, and lower markup ratios-the firm's productivity growth rate could increase as much as 10 percent. The Chinese government was serious about implementing performance contracts, and used measures considerably more radical than other countries used, hailing the contract system as the official national mode for reforming state enterprises. But most of the contracts have had little or no effect on growth rates and the observed frequency of contracts with good provisions is exceedingly low.

Perhaps the political economy of incentive contracts in government settings merits further study. Political considerations may preclude the design of incentive contracts for government actors that could produce the sort of productivity gains some private firms have achieved. One observer (Byrd 1991) points out that the central government gave local governments a good deal of discretion in implementing performance contracts and local governments had a tendency to adopt the lowest common denominator, a bare-bones performance contract.

This paper - a product of the Development Research Group - is part of a larger effort in the group to understand state enterprises.

Abstract:
This paper examines the determinants of the marriage timing decisions of young men and women in China. We pay particular attention to distinguishing three explanations for marriage timing: the independence hypothesis, which emphasizes growing economic independence; the career cycle hypothesis, which highlights the difficulty of school-to-work transition; and the search costs hypothesis, which point to structural factors of marriage markets related to search costs. The data set is a sample of Chinese couples with ample variations in marriage market features, personal characteristics, and regional patterns of growth. Exploiting the differences in marriage timing among the couples in our data set, we find empirical results that are largely consistent with the notion that marriage gains, search costs, and job complexity determine the timing of marriage. In particular, marriage is likely to be delayed for urban (but not rural) men and women with higher wage. Regional economic growth appears to slow down the tendency to get married for both men and women and in both cities and the countryside. Access to network of young people (via the Communist Youth League) facilitates marriage for all young people. Better-educated young people tend to get married later in life.

marriage timing, job complexity, search costs, school-to-work transition

Abstract:
Because each of the agent's multitasks can have several measures, the multitask agency theory predicts that incentive devices based on these measures can be complements or substitutes. However, the existing empirical literature on multitask agency considers only complementarity. This paper investigates both complementarity and substitutability of measures of CEO compensation theoretically and empirically. Using a panel data set of CEO contracts from more than 300 Chinese state-owned enterprises, we find empirical evidence that profits are not the only objective of the Chinese government in designing CEO contracts. Our findings about the determinants of incentive devices in China support predictions of the agency theory and the incomplete contracts theory.

CEO compensation, agency, multitask, complementarity, state-owned enterprises

Abstract:
Rigorous data-collection is important for accurate policy analysis. The paucity of data in developing and transition economies makes policy analysis in such countries difficult. The World Bank has attempted to remedy this problem by conducting numerous surveys. This paper explores the rich experiences of the Bank in designing and implementing firm-level surveys. Our exploration leads to a series of lessons and tools that we hope policy makers and researchers can use for creating more effective surveys in the future.

firm survey, questionnaire design, developing countries

Abstract:
This paper uses a new data set of Chinese state-owned enterprises (SOEs) and private firms to evaluate the effects of labor downsizing on firms' technical efficiency, financial performance, and employee wages. Since downsizers and non-downsizers differ greatly in firm characteristics, we use propensity score matching to deal with firm heterogeneity. We find that downsizing has serious short-term costs in terms of allocation efficiency and financial performance. For mild downsizing, SOEs suffer more in profitability, and private firms more in allocative efficiency. The distribution of surplus after downsizing is more favorable to owners in private firms, and labor in SOEs. For severe downsizing, SOEs and private firms exhibit lower TFP growth with similar magnitudes. Thus, the public sector downsizing has failed to achieve its objective of reversing the trends of declining productivity and profitability of state enterprises in the short run. Our findings imply that SOEs face slightly more severe labor constraints than private firms, and that private firms emphasize profit goals while SOEs place a greater weight on labor protection. Finally, controlling for differences in firm characteristics through matching makes important differences in the estimates of downsizing effects.

Downsizing, restructuring, matching, ownership, firm performance, income distribution, China

Abstract:
We investigate the determinants of regulatory reforms between 1990 and 1998 in 50 developing countries. We find that the reforms are attributable to differences in the configurations of interest groups and in the political structure - in particular, the decision-making mechanisms and the ideology of the legislature. Regulatory reforms are more likely in countries with strong pro-reform interest groups (a larger financial sector and a greater proportion of urban consumers) and less likely in countries where incumbent operators have already made large investments and hence have strong incentives to oppose the reforms. Democracy facilitates the actions of interest groups.

democracy, telecommunications, regulation, political structure, special interest groups, developing countries

Abstract:
This paper examines the magnitude, patterns, and determinants of the labor restructuring process in China's industrial sector using a firm-level dataset for the period between 1998 and 2002. The results show that the SOE sector has undergone substantial labor retrenchment. The removal of employment guarantees for state workers has led to substantial employment shifts both within and between sectors. As compared to many countries in Central and Eastern Europe in the early phase of transition, China has experienced a more synchronized pace of job destruction and creation, as well as higher rates of excessive reallocation. Our results also show that the employment adjustment and downsizing process has been driven largely by market forces, i.e., the changes in sales, wages, and technology, and the need to correct labor misallocations created by the managed labor system, such as over-manning and skill-mismatching. We find a notable resemblance in the patterns of enterprises' response to demand shocks between the state and the private sectors. These findings have important implications to the timing and sequencing of public sector reforms.

Downsizing, restructuring, timing and sequencing, labor market, ownership, China

Abstract:
Using a unique survey of 10,000 Chinese couples in 1991, this paper evaluates the impact of marriage market on life quality after marriage. Specifically, we compare three matchmaking means - self match, parental involvement, and friend introduction - and associate them with the degree of marriage harmony and joint couple income after marriage. We consider the agency cost of parent involvement and friend introduction, the market expansion effect of parents/friends matchmaking, and the self-selection effect driven by omitted individual attributes. In a number of specifications, we find that self-matched couples have the fewest domestic conflicts and the highest income. This result holds even after isolating the self-selection effect. Evidence suggests that the agency costs associated with friends or parents exceed the potential market expansion effect; the costs show up in compromised domestic harmony for parent-involved marriages, and reduced earning for friends-introduced marriages.

Marriage, matchmaking, marriage quality, china, information

Abstract:
Using a unique survey of 10,000 Chinese couples in 1991, this paper evaluates the impact of marriage market on life quality after marriage. Specifically, we compare three matchmaking means - self match, parental involvement, and friend introduction - and associate them with the degree of marriage harmony and joint couple income after marriage. We consider the agency cost of parent involvement and friend introduction, the market expansion effect of parents/friends matchmaking, and the self-selection effect driven by omitted individual attributes. In a number of specifications, we find that self-matched couples have the fewest domestic conflicts and the highest income. This result holds even after isolating the self-selection effect. Evidence suggests that the agency costs associated with friends or parents exceed the potential market expansion effect; the costs show up in compromised domestic harmony for parent-involved marriages, and reduced earning for friends-introduced marriages.

Marriage, information, china, family

Abstract:
How to make firm-level surveys more consistent, yielding data more relevant to policy analysis.

The World Bank has increasingly focused on firm-level surveys to build the data foundation needed for accurate policy analysis in developing and transition economies. Recanatini, Wallsten, and Xu take stock of some recent Bank surveys and discuss how to improve their results.

Lessons on data issues and hypothesis testing:

· Use panel data, if possible.

· Have enough information about productivity to estimate a production function.

· Avoid the paradigm of list the severity of the obstacle/problem on a scale of 1 to 5. Instead, ask for data on specific dimensions of the problem that will shed light on alternative hypotheses and policy recommendations.

· Pick particular disaggregated industries and sample those industries in each survey.

· Identify the most important policy interventions of interest and consider how you will empirically identify specific changes by picking instruments useful for doing so.

Lessons on questionnaire design:

· Incorporate only one idea or dimension in each question. Do not ask, in one question, about the quality, integrity, and efficiency of services, for example.

· Consider the costs and benefits of numeric scales compared with adjectival scales. Scales in which each point is labeled may be more precise than numeric scales in which only the endpoints are labeled. But responses are very sensitive to the exact adjective chosen and it may be impossible to translate adjectives precisely across languages, making it impossible to compare responses across countries.

· Recognize that the share of respondents expressing opinions will be biased upward if the survey does not include a middle (indifferent or don't know) category and downward if it does include the middle category.

· When asking degree-of-concern and how-great-an-obstacle questions, consider first asking a filter question (such as Do you believe this regulation is an obstacle or not?). If the answer is yes, then ask how severe the obstacle is.

· Be aware of the effects of context. The act of asking questions can affect the answers given on subsequent, related questions.

· Think carefully about how to ask sensitive questions. Consider using a self-administered module for sensitive questions. Alternatively, a randomized response mechanism may be a useful, truth-revealing mechanism.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to develop consistent cross-country firm level surveys. The authors may be contacted at frecanatini@worldbank.org, wallsten@leland.stanford.edu, or lxu1@worldbank.org.

Abstract:
Reform aimed at decentralizing ownership and control rights seems to work when it creates incentives for managers and employees to learn and to work hard - for example, by decentralizing the right to control wages, make production decisions, and appoint new managers. The empirical literature on the effects of ownership has not distinguished between the effects of ownership and the effects of control. It has also generally ignored the dynamic effects of various ownership and control rights. Using a rich set of panel data about changes in China`s state-owned enterprises, Xu examines the static and dynamic effects of decentralizing ownership and control rights.

He finds that productivity and growth rates improved significantly when reform improved the incentives for managers and employees to learn and to work hard - for example, by decentralizing the rights to control wages, make production decisions, and appoint new managers. Increasing profit-retention rates and adopting performance contracts - conventionally viewed as the most important reforms for China's state enterprises - did not improve productivity much.

Overall, decentralization accounted for at least 42 percent of productivity growth in Chinese state enterprises in the 1980s. Much of that gain came from improvements in the growth rate of productivity rather than in improved levels of productivity.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand the limits between the organization of a firm and economic performance.

Abstract:
While the literature on consumption insurance is growing fast, little research has been conducted on how rural consumption insurance is affected by democracy. In this paper the authors examine how consumption insurance of Chinese rural residents is affected if the local leader is democratically elected. Exploring a unique panel data set of 1,400 households from 1987 to 2002, they find that consumption insurance is more complete when the households are in villages with elected village leaders. Furthermore, democracy improves consumption insurance only for the poor and middle-income farmers, but not for the rich. These findings underline the importance of democratic governance for ensuring better rural consumption insurance and poverty reduction.

Rural Poverty Reduction, Consumption, Inequality, Services & Transfers to Poor, Economic Theory & Research

Abstract:
Around the turn of the century, China experienced perhaps the largest labor restructuring program in the world. This paper uses a new data set of Chinese industrial enterprises to examine what leads to downsizing, and tries to understand the effects of labor downsizing on firms' technical efficiency, financial performance, and employee wages. We find that downsizing is more prevalent in SOEs, and is more likely when enterprises are older, larger, and have higher excess capacity. For both SOEs and private firms, downsizing is more likely when the prices of their products drop, but private firms respond more dramatically. Moreover, downsizing has serious short-term costs in terms of total factor productivity. For mild downsizing, private firms suffer more deterioration in productivity. The distribution of surplus after downsizing is more favorable to labor in SOEs. For severe downsizing, SOEs and private firms both exhibit lower TFP growth with similar magnitudes. Our findings imply that private firms emphasize profit goals while SOEs place a greater weight on labor protection.

Downsizing, restructuring, ownership, firm performance, employee earning, China

Abstract:
Using a sample of households in 48 Chinese villages for the period 1986-2002, this paper studies the dynamic effects of major health shocks on household income and the role played by village elections in mitigating these effects. Our results show that in the first 15 years after a shock, a shock-hit household on average falls short of its normal income trajectory by 11.8% and its recovery would take 19 years. Based on the premise that shock-hit families impose negative externalities on richer families by borrowing from them, our political economy model predicts that the outcome of village elections would differ from that of a standard median voter model in that the elected village leaders tend to adopt pro-poor policies. Our empirical study finds that villages are more likely to establish a healthcare plan after the election is introduced. In addition, village elections reduce the probability of a household to borrow by 16.7% when one of its working adults is seriously sick. As a result, they reduce more than half of the negative effect of a health shock on household income.

health shocks, village governance, farmers' income

Abstract:
Using a sample of households in 48 Chinese villages for the period 1986-2002, this paper studies the dynamic effects of major health shocks on household income and the role played by village elections in mitigating these effects. Our results show that in the first 15 years after a shock, a shock-hit household on average falls short of its normal income trajectory by 11.8% and its recovery would take 19 years. Based on the premise that shock-hit families impose negative externalities on richer families by borrowing from them, our political economy model predicts that the outcome of village elections would differ from that of a standard median voter model in that the elected village leaders tend to adopt pro-poor policies. Our empirical study finds that villages are more likely to establish a healthcare plan after the election is introduced. In addition, village elections reduce the probability of a household to borrow by 16.7% when one of its working adults is seriously sick. As a result, they reduce more than half of the negative effect of a health shock on household income.

Abstract:
In this paper we study the determinants of provincial medal shares and of their dispersion for all the China National Games (from the 1950s to 2001), paying particular attention to change in behavior during the plan regime and the market regime. We find that provincial medal shares converged in the plan regime, and then diverged in the market regime. As in the Olympic medal literature, population and average income play fundamental roles in explaining medal shares. A novel finding is that the marginal productivities of both human and especially financial resources in raising medal shares are significantly higher in the market regime than in the plan regime. Moreover, the share of educated people is positively associated with medal share in the plan regime but not so in the market regime. The SOE share is positively related to medal share when it has ample variations, consistent with the literature on the Olympic Games that central planning economies appear to win more medals. Finally, rising urban-rural income disparity contributed to the divergence of medal shares for the last few National Games.

Abstract:
Performance contracts (PCs) - contracts signed between the government and state enterprise managers - have been used widely in developing countries. China's experience with such contracts was one of the largest experiments with contracting in the public sector, affecting hundreds of thousands of state firms, and offered a rare opportunity to explore how PCs work. On average, PCs did not improve performance and may have made it worse. But China's PCs were not uniformly bad; in fact, PCs improved productivity in slightly more than half of the participants. PC effects were on average negative because of the large losses associated with poorly designed PCs. Successful PCs were those that featured sensible targets, stronger incentives, longer terms, managerial bonds, and were in more competitive industries. Selecting managers through bidding was not associated with performance improvement. Good PC features were more often observed in state-owned enterprises (SOEs) under the oversight of local governments, that faced more competition, that were smaller in size, and that had better previous performance.

Abstract:
Performance contracts (PCs) -- contracts signed between the government and state enterprise managers -- have been used widely in developing countries. China's expertise with such contracts was one of the largest experiments with contracting in the public sector, affecting hundreds of thousands of state firms, and offered a rare opportunity to explore how PCs work. On average PCs did not improve performance and may have made it worse. But China's PCs were not uniformly bad; in fact, PCs improved productivity in slightly more than half of the participants. PC effects were on average negative because of the large losses associated with poorly-designed PCs. Successful PCs were those that featured sensible targets, stronger incentives, longer terms, managerial bonds, and were in more competitive industries. Selecting managers through bidding was not associated with performance improvement. Good PC features were more often observed in SOEs under the oversight of local governments, that faced more competition, that were smaller in size, and that had better previous performance.

Abstract:
Using a new data set of the telecommunications sector on privatization (1981-98 for 167 countries) and competition policies (1990-98 for roughly 50 countries), this Paper investigates the political economy determinants of privatization and liberalization in the telecommunications sector. Building on the framework of a generalized private interest theory, we derive hypotheses on how the characteristics of private interest groups and political structure affect policy changes in the telecommunications sector. We pay particular attention to how the effects of interest groups on policies vary from more democratic to less democratic countries. We find reasonably strong evidence in favour of the generalized interest group theory. Countries with stronger pro-reform interest groups (the financial services and the urban consumers) are more likely to reform. But countries are more likely to maintain state-owned monopolies in the sector when such a governance mode yields a higher pay-off for the governments - when the telecommunications sector has higher profitability and when the fiscal deficit is higher and cannot be more easily financed by borrowing from the financial market. Democracy appears to affect the pace of reform by magnifying the voices of interest groups and by moderating politicians' discretion.
telecommunications

Competition, democracy, political economy, political structure, privatization, special interest groups,

Abstract:
Using a new data set of the telecommunications sector on privatization (1981-98 for 167 countries) and competition policies (1990-98 for roughly 50 countries), this Paper investigates the political economy determinants of privatization and liberalization in the telecommunications sector. Building on the framework of a generalized private interest theory, we derive hypotheses on how the characteristics of private interest groups and political structure affect policy changes in the telecommunications sector. We pay particular attention to how the effects of interest groups on policies vary from more democratic to less democratic countries. We find reasonably strong evidence in favour of the generalized interest group theory. Countries with stronger pro-reform interest groups (the financial services and the urban consumers) are more likely to reform. But countries are more likely to maintain state-owned monopolies in the sector when such a governance mode yields a higher pay-off for the governments - when the telecommunications sector has higher profitability and when the fiscal deficit is higher and cannot be more easily financed by borrowing from the financial market. Democracy appears to affect the pace of reform by magnifying the voices of interest groups and by moderating politicians' discretion.
telecommunications

Competition, democracy, political economy, political structure, privatization, special interest groups,

Abstract:
Weak institutions ought to deter foreign direction investment (FDI), and mass media stories highlight China's institutional deficiencies, yet China is now one of the world's largest FDI destinations. This incongruity characterizes China's paradoxical growth. Cross - country regressions show that China's FDI inflow is not exceptionally large, given the quality of its institutions and its economic track record. Institutions clearly determine a country's allure as an FDI destination, but standard measures of institutional quality can be problematic for countries undergoing rapid institutional development, and can usefully be augmented by economic track record measures. Deng Xiaoping's 1993 southern tour heralded sweeping reforms, and this regime shift is insufficiently reflected in commonly used measures of institutional quality. China's FDI inflow surge after these reforms resembles similar post-regime shift surges in the East Bloc, and so is also unexceptional. Recent arguments that China's FDI inflow is inefficiently large because weak institutions deter domestic investment while special initiatives attract FDI are thus either unsupported or not unique to China.

Abstract:
Using data from a recent national survey on the ownership reform of state-owned enterprises in China, we study the effects of reducing politician control and agency problems on a number of reform outcomes. Taking into account the endogenous nature of the reform, we find that these outcome measures of the reform's success are positively affected by the lessening of politician control through increasing the firm's flexibility in labour deployment and by the mitigation of agency costs through the introduction of more effective corporate governance mechanisms such as one-share one-vote and shareholding-based board structure composition. Ownership structure also matters: relative to shareholding by the state, foreign ownership has a positive effect on reform outcomes; individual (mostly employee) shareholding has a negative or insignificant effect. Somewhat surprisingly, operating autonomy (excluding labour deployment flexibility) has a negative effect on firm performance, suggesting serious agency problems in the reformed enterprises.

Abstract:
Entertainment and Travel Costs (ETC) is a standard expenditure item for Chinese firms with an annual amount equal to about 20 percent of total wage bills. We use this objective accounting measure as a basis to analyze the composition of ETC and the effect of ETC on firm performance. We rely on the predictions from a simple but plausible model of managerial decision-making to identify components of ETC by examining how the total ETC responds to different environmental variables. In our empirical analysis we find strong evidence that firms' ETC consists of a mix that includes bribery to government officials both as "grease money" and "protection money", expenditures to build relational capital with suppliers and clients, and managerial excesses. ETC overall has a significantly negative effect on firm performance, but its negative effect is much less pronounced for those firms located in cities with low quality government service, those who are subject to severe government expropriation, and those who do not have strong relationship with suppliers and clients. Our findings have important implications on how to effectively curb corruption.

Abstract:
Public listing is a key reform measure for large state-owned enterprises (SOEs) in China. We find evidence that public listing lowers state ownership significantly, lessens firms' reliance on debt finance, and allows firms to increase capital expenditure, at least temporarily. We also find that ownership structure affects post-listing performance. However, we find no statistical evidence of a positive effect of public listing on firms' profitability. We suggest alternative interpretations of the last finding.

Abstract:
This paper examines the impacts of work experience acquired while youth were in high school (and college) on young men's wage rates during the 1980s and 1990s. Previous studies have found evidence of sizeable and persistent rates of return to working while enrolled in school, especially high school, on subsequent wage growth. Such findings may represent causal effects of having acquired work experience while still enrolled in school, but they may also be the result of failure to fully account for individual differences in young adults' capacities to acquire such skills and be productive in the work force later in life. We re-examine the robustness of previous attempts to control for unobserved heterogeneity and selectivity. We explore more general methods for dealing with dynamic forms of selection by explicitly modeling the educational and work choices of young men from age 13 through their late twenties. Using data on young men from the 1979 National Longitudinal Survey of Youth (NLSY79), we find that the estimated returns to working while in high school or college are dramatically diminished in magnitude and statistical significance when one uses these dynamic selection methods. As such, our results indicate a decided lack of robustness to the inference about the effects of working while in school that has been drawn from previous work.

Abstract:
The importance of a country's investment climate for economic growth has recently received much attention. In this paper we use a new survey of 1,500 Chinese enterprises in five cities to measure more precisely components of the investment climate and their effects on firm performance. Our firm-level analysis reveals that both ownership and investment climate measures matter for investment, productivity and growth. In particular, firm performance is positively correlated with foreign and domestic private ownership, light regulatory burdens, limited corruption, technological infrastructure and labour market flexibility. In contrast, gains from improving banking access and physical infrastructure are quite limited.

Abstract:
This article analyzes the experience with performance contracts between developing country governments and the managers of their state owned enterprises. It identifies how problems of information asymmetry, incentives, and commitment can lead to shirking. It applies this conceptual framework to a sample of 12 contracts with monopoly state enterprises in six developing countries and finds that all suffer from serious contracting problems and there is no pattern of improved performance that can be attributed to the contracts.

Abstract:
Using data from a recent national survey on the ownership reform of state-owned enterprises in China, we study the effects of reducing politician control and agency problems on a number of reform outcomes. Taking into account the endogenous nature of the reform, we find that these outcome measures of the reform's success are positively affected by the lessening of politician control through increasing the firm's flexibility in labour deployment and by the mitigation of agency costs through the introduction of more effective corporate governance mechanisms such as one-share one-vote and shareholding-based board structure composition. Ownership structure also matters: relative to shareholding by the state, foreign ownership has a positive effect on reform outcomes; individual (mostly employee) shareholding has a negative or insignificant effect. Somewhat surprisingly, operating autonomy (excluding labour deployment flexibility) has a negative effect on firm performance, suggesting serious agency problems in the reformed enterprises.

Abstract:
Using a sample of Chinese state-owned enterprises spanning 1980 to 1994, we investigate the factors that determine the sources of finance for firm-level fixed investment, including retained earnings, bank finance, and government transfers. Direct government transfers were not significantly associated with profitability throughout the period. In contrast, bank finance was positively linked to both profitability and some types of reform. Reforms that enabled managers to self-select, and thus expose themselves (and their employees) to greater risk, were positively associated with acquiring bank finance. The association between bank finance and profitability weakened in the 1990s as banks increasingly assumed bailout responsibility.

China, SOE reform, Signaling, Banking, Financial policy

Abstract:
The multitask principal-agent theory argues that incentive devices for the agent tend to be complementary due to the need for balanced allocation of effort among the tasks. A growing body of empirical literature appears to support this notion. However, when there can be several signals for each of the tasks, incentive devices based on individual signals for each task can be complements or substitutes for one another. This paper studies the complementarity and substitutability theoretically and empirically. The theoretical study extends the framework of Holmstrom and Milgrom (1994) to incorporate the case of multiple signals for some tasks. The empirical work is based on a rich panel data set of managerial incentives from more than 300 Chinese state-owned enterprises. The empirical findings support most of the theoretical predictions but also suggest that profits are not the only objective of the Chinese government (the principal) in designing managerial contracts. Our findings about the determinants of the incentive devices offer support to some notions in the agency theory and the literature on incomplete contracts.
state-owned enterprises.

Agency theory, multitask, CEO incentives, complementarity, managerial discretion, substitutability

Abstract:
Through the lens of the theory of the firm, I examine how a series of reforms affected the performance of Chinese state-owned enterprises with a panel dataset of more than 500 firms. The study finds that performance improved with various reforms such as increasing competition, appointing new managers, using firm-level pay sensitivity, raising marginal profit retention rates and allowing managers to determine wages and to make production decisions. Adopting performance contracts did not improve performance significantly. These results confirm the importance of competition, control rights, managerial and internal incentives, as emphasized by the theory of the firm.

Abstract:
This paper uses an encompassing framework developed by Murphy et al. (1991, 1993) to study corruption and how it affects income distribution and growth. We find that (1) corruption affects income distribution in an inverted U-shaped way, (2) corruption alone also explains a large proportion of the Gini differential across developing and industrial countries, and (3) after correcting for measurement errors, corruption seems to retard economic growth. But the effect is far less pronounced than the one found in Mauro (1995). Moreover, corruption alone explains little of the continental growth differentials. In countries where the asset distribution is less equal, corruption is associated with a smaller increase in income inequality and a larger drop in growth rates.

Abstract:
We describe features of the Chinese financial system that inhibited effective financial intermediation from 1980 to 1994 and investigate whether, despite these impediments, bank finance flowed to state-owned enterprises with higher subsequent productivity than did direct government transfers. We find that it did, at least in the 1980s, and conclude that bank employees assessed SOE credit risks substantially better than did the bureaucrats responsible for allocating direct transfers. Banks imposed harder budget constraints on SOEs than bureaucrats, but those constraints softened as the 1990s progressed. As a result, increased bank finance did not flow to relatively productive SOEs later in the period.