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

December 04, 2012

Abstract:     
Using a data set that traces the ten-year history of 80 Chinese rural enterprises, known as township and village enterprises, we study the implications of introducing managerial incentives and better-defined ownership for a firm's financial performance. During this period, these mostly community-owned, local-government-controlled socialist collective firms first introduced managerial incentive contracts and then more clearly defined income and control rights. Managerial incentives have a positive but statistically insignificant effect on these firms' performance measured by the return on assets or return on equity. Performance is significantly better under ownership forms with better-defined property rights than under community ownership, even when the latter is supplemented with managerial incentive contracts.