Why Is the Productivity Analysis Misleading for Gauging State Enterprise Performance?

A large literature has documented impressive productivity growth in China's state enterprises during the reform. The evidence has been used to support the view that China's enterprise reform has been successful. We cast doubt on this view by arguing that productivity is not a reliable measure of state enterprise performance. A model is used to show that when firms are not profit maximizers, higher productivity may actually lead to greater allocative distortion, lower profits and lower economic efficiency. There is evidence this may be the case for many Chinese state enterprises during the reform.