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

We argue that state-owned enterprise reform has failed in China, because in centive mechanisms that confront the key stakeholders did not elicit effici ent behavior. Although incentive mechanisms were intended to elicit more ef fort, incentives became de facto improper because of a number of developmen ts. This paper analyzes alternative sharing or incentive, systems and highl ights the interdependency among property rights, incentives, and enforcemen t. A common-property model is put forward to analyze recent reforms and to show that alternative property right assignments have complex and diverse c onfigurations 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, rat her than actual, effort are more promising. An ideal arrangement that combi nes equal sharing and proportional effort is proposed. (C) 1999 Elsevier Sc ience Inc. All rights reserved. JEL classification: K2; L2; P0.