CEO Incentive Contracts in China: Why Does City Location Matter?

Although China is now the second largest economy in the world, we know little about what influences the use of executive incentives outside the public listed sector. This paper is the first to examine incentive contracts for CEO\'s across all sectors of the economy. We do so using World Bank enterprise data for 2005. We show that incentive contracts are commonplace but that their incidence varies significantly across Chinese cities. We test two alternative hypotheses to explain the pattern of incentives across China\'s cities, one relating to the differential rate of foreign direct investment (FDI) into China\'s cities, the other relating to the rate at which SOEs were privatised. We find CEO incentive contracts are positively correlated with the speed with which cities privatised their SOEs and negatively correlated with the introduction of FDI via Special Economic Zones (SEZ\'s).