Abstract
This paper investigates structural wage reform pertaining to medium and large state-owned enterprises, within the context of the 1988 Enterprise Law. Evidence exists that this reform package failed to achieve its full potential. A primary purpose of the paper is to analyze this failure with the aid of principal-agent analysis, in which the manager is the principal and the workers are the agents. The analysis suggests that the reforms performed poorly since the workers' incentive problem was not adequately addressed. Much of the bonuses became fixed wage supplements, not tied to the output or to the profit of the enterprise. Moreover, free-riding incentives among workers were not adequately addressed. Multilevel concerns and the formation of coalitions among workers and supervisors are also analyzed. Means for making the reforms more effective are suggested. For example, rule governance can dilute collusion.
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