184 QUARTERLY JOURNAL OF ECONOMICS Workers' lack of motivation has been a major problem in Chinese enterprises. That productivity could be improved by strengthening the workers' incentives is suggested by anecdotal accounts of inactivity in pre-reform Chinese factories--of workers idling away the day after fulfilling some minimal quota. One of the reforms tried in China was the shifting of responsibility for output decisions from the level of the state to the level of the firm. another as to increase the fraction of its profits that the firm could retain The hypothesis to be developed and tested here is that a firms manager should respond to these increases in autonomy by strengthening the workers'performance incentives, and as result, the firm should become more productive Reforms can be ineffective Managers may fail to respond to the opportunities created by their expanded autonomy. Partial efforts at reform may be contradictory either with themselves with the remnants of the planning system. It is often argued that artial reforms are useless. " I am relatively pessimistic about the effectiveness of reforms that rely on shifting decision making and financial responsibility to the enterprise level until there is a fundamental reform of the price system, 'says Johnson [1988, pp S241-$242], for example: " Planned control by the center of inputs d output may well be a superior nth best solution to decentral- ized decision making with an inappropriate price structure. We sk whether China's partial reforms--shifting decision responsibili- ties to managers while leaving the firms state- owned-has resulted in perceptible improvements in enterprise productivity Our empirical analysis will ask whether, when the responsibil ity for deciding output levels was shifted from the state to the firm and when the firm's marginal profit-retention rate was increased agers of Chinese state-owned enterprises responded by strengthening the discipline imposed on workers(by increasing the proportion of the workers'income paid in the form of bonuses y increasing the fraction of workers whom, being on fixed-term contracts, it was in principle possible to fire). We shall then ask hether the new incentives were effective. Did productivity in crease significantly with the stronger incentives? The next set of questions will be about who benefited from the reforms. Did the increased autonomy result in higher incomes for workers or managers?Was autonomy followed by more investment by the enterprises? Did autonomy result in smaller subsidies or larger Chinese industrial productivity growth accelerated markedly