Career concerns, incentive contracts, and contract renegotiation in the Chinese political economy

This dissertation aims at contributing to the understanding of the incentive issues in Chinese political economy. In particular, I look into the incentive structure of certain key actors—local officials and bank managers in the context where ex ante incentives contracts are probably subject to ex post renegotiation.; The first essay establishes empirical relationship between the turnover of top provincial officials and economic performance in China during the period 1980–1993. While most studies attribute strong incentive of Chinese local officials to economic incentives, I attach special importance to their career concerns arising from a well-structured political hierarchy. Using a Cox proportional hazard rate model, I present supporting evidence on termination as incentive device in punishing poorly performing local officials. This chapter helps draw attention to re-evaluating the historical significance of the reforms in personnel policies launched in late 1970s and early 1980s.; The second essay contributes to the growing literature on China's central-local fiscal relations, by adding new dimension of analysis—career concerns of local officials—into the picture. Based on a panel data spanning from 1980 to 1992, I find additional and significant explanatory power of career concerns, after controlling for the effect of fiscal incentive arising from fiscal-sharing contracts. The way fiscal incentives motivate local officials is also affected by the intensity of career concerns. My empirical analysis goes further to examine how the presence of career concerns shapes one important aspect of China's central-provincial fiscal relations—the enforcement of ex ante fiscal-sharing contracts.; The third essay, using a unique survey data from the Chinese banking industry, investigates the effect of incentive contracts on performance when contracts are subject to ex post renegotiations. In a transition context, I find both ex ante and ex post contracts have a positive effect on bank performance, but overall the latter has a stronger and more significant effect. This finding implies that in the presence of ex post renegotiation the mere use of ex ante incentives may underestimate the effect of incentive contracts on performance. The determinants of contract renegotiation are also examined.