Empirical Effects of Performance Contracts: Evidence from China

Posted: 29 Feb 2008

See all articles by Mary M. Shirley

Mary M. Shirley

World Bank - Development Research Group (DECRG)

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

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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.

JEL Classification: D2, L2, L3

Suggested Citation

Shirley, Mary M. and Xu, Lixin Colin, Empirical Effects of Performance Contracts: Evidence from China. The Journal of Law, Economics, and Organization, Vol. 17, pp. 168-200, 2001. Available at SSRN: https://ssrn.com/abstract=832270

Mary M. Shirley (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

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Lixin Colin Xu (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
MC 3-427
Washington, DC 20433
United States
202-473-4664 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/cxu

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