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Do China's State‐Owned Enterprises Maximize Profit?
Author(s) -
CHOE CHONGWOO,
YIN XIANGKANG
Publication year - 2000
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2000.tb00023.x
Subject(s) - budget constraint , incentive , china , profit maximization , profit (economics) , microeconomics , maximization , certainty , constraint (computer aided design) , economics , business , industrial organization , mathematics , geometry , political science , law
China's state enterprise reform is often believed to have made profit the most important goal of SOEs. Nonetheless the poor performance of SOEs relative to other forms of enterprises remains puzzling. We offer an explanation based on the incentive aspect of the reform, which complements the theory based on a soft budget constraint. Under certainty, the incentives of enterprise managers to maximize their own compensation are consistent with profit maximization with or without a soft budget constraint. Under uncertainty, however, the managers' incentives generally deviate from expected profit maximization. This deviation is dampened by, but still exists even without a soft budget constraint.