This paper aims to model the cost behavior of Chinese state-owned enterprises in the 1980s. Given production autonomy and profit-related bonus incentives, state firms are expected to increase profits and therefore bonuses by changing their cost behaviors more rationally. However, since institutional constraints remain and distort the rational demand of the firm for input factors, the changes cannot go as far as expected by the standard neoclassical cost minimization theory. Based on this, we derived a total cost function for Chinese state firms restricted by the government control over their total wage bills. We then test it using a panel data of 386 state manufacturing enterprises in the period 1983-87. It is found that the model predicted well. Despite the constraints, the reform did lead the firms to respond to both changes in factor prices in the directions expected by cost minimizing behavior and to bonus incentives to produce more efficiently. Copyright 1998 by Taylor and Francis Group
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Volume (Year): 12 (1998) Issue (Month): 1 (January) Pages: 25-37 Download reference. The following formats are available: HTML
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