CEO incentive contracts in China: why does city location matter?

CEO incentive contracts are commonplace in China but their incidence varies significantly across Chinese cities. We show that city and provincial policy experiments help explain this variance. We examine the role of two policy experiments: the use of Special Economic Zones (SEZs) to attract Foreign Direct Investment (FDI), and the privatisation of State-Owned Enterprises (SOEs). The introduction of SEZs is found to be uncorrelated with the prevalence of CEO incentive contracts. However, firms are more likely to use such contracts in areas that saw rapid SOE privatisation, irrespective of the firm’s own current ownership status and irrespective of the size of the SOE sector in the late 1970s. The positive effect of privatisation is robust to various estimation techniques and model specifications. These findings suggest that domestic privatisation policies have been more influential than FDI in driving the expansion of incentive contracts in China.