功夫：2:00-3:30pm, October 11
How do performance incentives affect firm productivity? In 1978, Chinese industrial planners carried out major reforms of the compensation system in state-owned enterprises (SOEs), introducing bonuses which linked pay to measures of current performance. Previous studies have argued that bonuses increased effort levels and led to large increases in productivity. However, since SOE incentives were based solely on current performance, they could have encouraged enterprises to concentrate their efforts on meeting short-run targets. Shifting effort toward short-run goals should increase productivity temporarily, but could have a negative effect in the long-run. I collect a unique panel of compensation, employment, and output statistics for the Chinese iron and steel industry and use these data to estimate the short- and long-run effects of incentive use on labor productivity during the early period of SOE reform, 1976 to 1988. The results indicate that incentives distorted effort allocation and negatively affected overall firm performance. In the data, incentives were associated with a small increase in labor productivity in the short-run, but a much larger decrease in the long-run.
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