JOURNAL OF POLITICAL ECONOMY managerial labor market. We suggest that one important result of the economic reforms was the development of an improved system of managerial resource allocation that is responsive to market forces The overall objective of the reforms was to move from a system under which enterprises obeyed detailed centralized commands to a decen- tralized system that rewarded enterprises for improved productivity As a part of this effort, the reforms transformed the role of manag ers, requiring them to sign contracts outlining their responsibilities nd rewards, and enacting new incentives and punishments. We dem onstrate below that this new system was working surprisingly well by he late 1980s: managerial efforts were being rewarded and manage- rial resources being assigned in accordance with criteria established by market forces This is perhaps a controversial thesis. The conventional view of China seems to be that managerial assignments in state-owned enter- prises are still governed by bureaucratic and political considerations and managers are subject to rigid supervision and control. It is, how ever, widely appreciated that the reforms of the 1980s were directed the efficiency of enterprises by replacing direct control at improvin ith managerial incentives. New incentive systems such from above w as the"profit responsibility system" were introduced that linked re- wards to managers to improvements in firm performance. However, hile necessary, it is not sufficient to provide incentives alone. Al- though some managers who were appointed prior to the reforms could be expected to welcome and respond to the new incentives others might be expected to have trouble adapting or, worse, be resis tant to change. a thoroughgoing reform must not just change the incentive environment but also must provide a mechanism for select- ing managers who will be responsive to the new opportunities. Ap- propriate supervision and replacement of managers may be as impor tant as the provision of incentives In this paper we first examine the process of managerial turnover. 'e show that managers changed jobs sufficiently frequently to sup- port a functioning managerial labor market. We further study those markets by analyzing two types of events. First, we analyze the circum- stances around the most recent change of managers and show that both the fate of the prev ous man and the conditions of the new manager's appointment can be partially explained by the firm's performance immediately before the change of managers. Second, we analyze the circumstances around the most recent managerial contract, which need not coincide with replace ment of the incumbent manager. Managerial contracts were the cen- tral innovation of the managerial reforms of the 1980s. Nearly all the managers in our sample had signed multiyear managerial contracts