The Incentive Of CEO In SOEs Under Compensation Regulation-Based On Inequity Aversion

The reform of SOEs is a long-lasting story since1990s. More and more new problems have been discussed, especially for the incentives of managers.Nowadays, the incentives of managers include the pecuniary and non-pecuniary ones. The former is salary and the other is from control compensation, especially for perks.The regulation for salary and overuse of perks are two characters in Chinese SOEs.The first character is the regulation on salary. More burdens on the SOEs lead to ambiguous identity of managers. The intervention by government is the main reseason for regulation on salary. It is said that the legal regulations since2009are more and more severe.On the other hand, the perks are important corruption. The papers show that perks have been number one corruption in Chinese SOEs. Many scholars say that regulation partly leads to perks.So, how to analyse the relationship between regulation of salary and perks is the main topic in this paper.The base of theoretical analysis is the behavioral labor economics:the unequality-aversion preference. On the contrary to the traditional economics, behavioral economics focuses on the other-regarding perferences. Fehr et.al., show that many experiments such as trust games, gift-exchange games, public games include fairness and reciprocity preferences; furthermore, Rabin built psychological game theory to model this process. But the most important model in this field is made by Fehr in1999, named unequality-aversion preference. This paper take it as a reference point in the theoretical ananlysis. Another important assumption was put forward by Kahneman, the so-called "anchor-effect" in choice.Literature on regualtion on salary and perks are different. The regualtion on salary is characteristic in Chinese SOEs, which is significantly different from wesetern contries. So the literature in this area is limited, most of which focus on the economic outcome of regualtion. But for China, is it right of wrong to regulate managers’compensation? This is the first question in this paper. Many scholars believe the intervention from government lead to the distortion in incentives, which bring too much perks. Huang found that the political incentive of managers is the fundamantal reseason for regulation. But he did not give us empirical evidence. On the other hand, the papers on perks mostly focus on empirical analysis, which are lack of theoretical base.Logically, the starting point is the regualtion on salary. Why we need regulations? Does it have influence on effiency? The regualtions on salary in Chinese SOEs is charateristic in Chines economic reform, which have three steps. But the build of modern enterprises does not mean the SOEs have clear property right. The intervention in the managers still exists, which lead to the ambiguous identity in enterprises. The politcial identiy is one important assumption in the theoretical ananlysis. The behaviroal "principle-agent" model shows that political incentive made principle regulate the pecuniary incentive and keep fairness. The following evidenceThe second question is on the perks in SOEs. Many literature show that the property rights,dividende and many other factos influence the perks. But more traditional research believe pecunairy compensation is the most important factor. This paper follows the pecunairy one to analyse the basic outcome of regualtion:perks. Similarly, the behavioral "principle-agent" model includes the agent’s unequality-aversion perference and "anchor-effect" in this analysis. The theoretical model shows that regualtion on salary leads to more perks, which also has been proved.The analysis above give us two conclusions:(1)The political incentive and intervention by government leads to regulation on salary;(2)The "anchor-effect" and "unequality-aversion preference" make agent more allergic to pecuniary regulation, which lead to more perks. So, in order to promote the reform of SOEs, the government needs to give up the intervention and build up the market of managers.As for the research method, this paper uses theoretical and empirical combination. For the theoretical analysis, the model is based on the behavioral labor economics, which incorporats behavioral factors into the traditional "principle-agent"’ model; the empirical ananlysis uses the unbalanced panel data to prove the conclusions, which incorporates reference point as the comparision.There two main innovations in this paper:the first one is on model. The traditional research on regualtion just includes pecuniary compensation in the utility function, which cannot characterise the political incentive in Chinese SOEs. This paper make it up and build a model based on double incentives in behavioral "principle-agent" model. Especially, in the model of perks, it puts the assumption of "anchor-effect" in the agent’s utility function, which provides a new ananlysis on perks; the second innovation is the use unbalaned panel in empirical ananlysis. This method uses more data in the ananlysis and gives us more robust outcome.