question archive When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction
When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction
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When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager was the winning bidder, firm productivity tended to increase dramatically. When outside bidders won, there was little productivity improvement. If incumbent managers were not generally more qualified, how can you explain this result?
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One of the possible explanation is private information. Incumbents know a lot more about the profitability of a state-owned enterprise than a typical outsider. Therefore, when there are incumbents bidding for manager position, it is more likely that the enterprise is potentially profitable - and that the current unprofitability is due to something else, such as a lack of incentives. In such cases, incumbents are more likely to bid aggressively and win. In contrast, in cases where the enterprise is not profitable, incumbents do not have incentives to bid aggressively, and uninformed outsides can win the bid, but later on see little improvement in profitability.
