The incentive structures of China's enterprises under contract responsibility systems

Examining China's contract system in an analytic framework, the author constructs two models (Model I the fixed quota system, and Model II the ratchet system). Maximizing the short‐run profit is found to be a plausible managerial objective and there is no incentive to conceal profit in a given contract. Hence, Chinese contractors would attempt to fulfill feasible profit quotas, and, in order to obtain bonuses, they would argue for low profit base, raise the output prices, and inflate the profits by false reporting.