The authors study the impact of government-led incentive systems by examining a staggered reform in the Chinese state-owned enterprise (SOE) performance evaluation policy. To improve capital allocative efficiency, in 2010, regulators switched from using return on equity (ROE) to economic value added (EVA) when evaluating SOE performance. This EVA policy adopts a one-size-fits-all approach by stipulating a fixed cost of capital for virtually all SOEs, ignoring the potential heterogeneity of firm-specific costs of capital. The authors show that SOEs did respond to the performance evaluation reform by altering their investment decisions, more so when the actual borrowing rate was further away from the stipulated cost of capital. The authors paper provides causal evidence that incentive schemes affect real investment and sheds new light on challenges faced by economic reforms in China.
Session Chair: Michael SONG
Professor, Department of Economics, Chinese University of Hong Kong and Senior Fellow, ABFER
Updated 24 Mar 2022
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