Does profit-sharing work in a centrally-planned economy? Evidence from the Chinese state industries

Many studies indicate that profit-sharing is an effective incentive to boost productivity of firms in the western economies such as USA, UK and Germany. Whether a similar incentive scheme can work in a centrally-planned economy like China has not been well researched. China introduced a profit-sharing and bonus-payment scheme in the state-owned enterprises (SOEs) from 1979 in an attempt to reform the state industries. Using a modified CES production function in a non-linear simultaneous system, this study aims to estimate the impact of such a scheme on enterprise performance. It reveals that both labour quality and bonus incentive played an important role in raising SOEs' productivity