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Incentive Contracting versus Ownership Reforms: Evidence from China's Township and Village Enterprises

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Chun Chang Yijiang Wang
Brian McCall
Yijiang Wang

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Abstract

We use a unique data set to study the implications of introducing managerial incentives and, in addition to incentives, better defined ownership for a firm's financial performance. The data set traces the ten-year history of 80 Chinese rural enterprises, known as township and village enterprises. During this period, these originally (mostly) community owned, local government controlled socialist collective firms were first allowed to introduce managerial incentive contracts and then to change to ownership forms of more clearly defined income and control rights. The study finds that introducing managerial incentives had a positive but statistically insignificant effect on these firms' performance measured by accounting return on assets or return on equity. It also finds that the performance is significantly better under ownership forms of better-defined rights than under community ownership even when the latter is supplemented with managerial incentive contracts. The findings shed lights on some important theoretical and policy issues. Classification-JEL:

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 365.

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Date of creation: 01 Nov 2000
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Handle: RePEc:wdi:papers:2001-365

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  2. McMillan, John & Naughton, Barry, 1992. "How to Reform a Planned Economy: Lessons from China," Oxford Review of Economic Policy, Oxford University Press, vol. 8(1), pages 130-43, Spring.
  3. John McMillan, 1993. "Autonomy and Incentives in Chinese State Enterprises," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich.
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  4. Chang Chun & Wang Yijiang, 1994. "The Nature of the Township-Village Enterprise," Journal of Comparative Economics, Elsevier, vol. 19(3), pages 434-452, December. [Downloadable!] (restricted)
  5. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  7. Jiahua Che & Yingyi Qian, 1998. "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises," William Davidson Institute Working Papers Series 59, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  8. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  9. Groves, Theodore, et al, 1994. "Autonomy and Incentives in Chinese State Enterprises," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 183-209, February. [Downloadable!] (restricted)
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  10. Jefferson, Gary H & Rawski, Thomas G, 1994. "Enterprise Reform in Chinese Industry," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 47-70, Spring. [Downloadable!] (restricted)
  11. Bardhan, Pranab & Roemer, John E, 1992. "Market Socialism: A Case for Rejuvenation," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 101-16, Summer. [Downloadable!] (restricted)
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  1. Takao Kato & Cheryl Long, 2004. "Executive Compensation, Firm Performance, and State Ownership in China: Evidence from New Panel Data," William Davidson Institute Working Papers Series 2004-690, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  2. Takao Kato & Cheryl Long, 2005. "Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges," IZA Discussion Papers 1767, Institute for the Study of Labor (IZA). [Downloadable!]
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  3. Takao Kato & Cheryl Long, 2006. "CEO Turnover, Firm Performance and Enterprise Reform in China: Evidence from New Micro Data," IZA Discussion Papers 1914, Institute for the Study of Labor (IZA). [Downloadable!]
  4. Anming Zhang & Yimin Zhang & Ronald Zhao, 2001. "Profitability and Productivity of Chinese Industrial Firms: Measurement and Ownership Implications," Microeconomics Working Papers 230, East Asian Bureau of Economic Research. [Downloadable!]
  5. Sandeep Mohapatra & Rachael Goodhue & Scott Rozelle, 2008. "Incentive Complementarity in China’s Rural Enterprises," Review of Industrial Organization, Springer, vol. 33(1), pages 63-79, August. [Downloadable!] (restricted)
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