Abstract
This paper uses a national survey of 200 Chinese town and village enterprises (TVEs) from 1985 to 1990 to explore empirically the effect of contractual arrangements on the performance of enterprises under Chinese institutional conditions. A theoretical model that emphasizes a potentially important role for local government effort in a situation of double-sided moral hazard is developed to explain why the share profit system may produce better incentives than the quota profit system. The paper shows that, from a profit maximization perspective, the trend away from share profit contracts to quota profit contracts among Chinese TVEs in the late 1980s may have been premature.J. Comp. Econom.,June 1998,26(2), pp. 317–337. University of Southern California, Los Angles, California 90089 and National Taiwan University, Taiwan, Republic of China; University of Southern California, Los Angeles, California 90089; and China International Capital Corporation, Beijing, People's Republic of China.
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