China's Evolving Managerial Labor Market

Evidence is given that the reforms of the 1980's in Chinese state-owned enterprises strengthened a nascent managerial labor market by incorporating many of the incentives present in Western managerial labor markets, although in other forms. Poorly performing firms were more likely to have a new manager selected by auction; to be required to have a higher security deposit posted by the manager; and to be subject to more frequent review of the manager's contract. Managers could be, and were, fired for poor firm performance. A manager's pay was linked to the firm's sales and profits and this link was significantly strengthen by the reforms. The substitution of incentives for central control of enterprises was intended, in part, to improve productivity -- a result documented in other studies. We demonstrate that, in addition, the economic reforms helped develop an improved system of managerial resource allocation responsive to market forces. Acknowledgements: We thank the Ford Foundation ..