Stakeholder incentives and reforms in China's state-owned enterprises: A common-property theory

Abstract

We argue that state-owned enterprise reform has failed in China, because incentive mechanisms that confront the key stakeholders did not elicit efficient behavior. Although incentive mechanisms were intended to elicit more effort, incentives became de facto improper because of a number of developments. This paper analyzes alternative sharing or incentive systems and highlights the interdependency among property rights, incentives, and enforcement. A common-property model is put forward to analyze recent reforms and to show that alternative property right assignments have complex and diverse configurations of positive and negative externalities. Incentive mechanisms that favor more equal distribution are the most inefficient, whereas those that differentiate among heterogeneous stakeholders based on effective, rather than actual, effort are more promising. An ideal arrangement that combines equal sharing and proportional effort is proposed.