1090 Y. Qian et al./ European Economic Review 43(1999)1085-1094 To illustrate how our framework works, let us look at an example of enter prise reform in transition. In the U-form, the reform is organized by specialized ministries, each ministry being responsible for either enterprise restructuring or the social safety net, and the national government is responsible for matching e attributes between enterprise restructuring and the social safety net. It is possible that there will be bad coordination between layoff policies and the creation of the social safety net, leading to riots. For example, the rules for eligibility set at the national level may be completely inappropriate in some important regions which have a concentration of older workers, but the national rule for pension eligibility does not make workers close to pension age eligible for any benefits. In the M-form, the reform is organized by regions, each regional government being responsible for matching the attributes between enterprise restructuring and the social safety net in its own region. Under this type of organization, layoff policies and the institution of social safety nets can be better coordinated within ach region so that riots can be prevented. 3. M-form vs U-form We first compare the performances of the U-form and the M-form in the case of a"big bang' reform where two complementary reforms I and 2 are imple mented simultaneously in regions A and B. Under the M-form, every unit manager will be responsible for matching the attributes of the two tasks within his unit With perfect local information, attribute matching under the M-form will be performed perfectly. If a program is good, which happens with probabil ity p, the total payoff from the two units is A/(1-5). If a program is bad, which happens with probability 1-P, the current payoff is zero, and a new program will be tried in the next period. Therefore, the expected payoff of continued reform in an m-form is 兀m2=pA/1-)+(1-p) Tm2=pA/(1-b[1-(1-p)]} On the cost side, in period 1, 2C is paid because two managers are involved in coordination. With probability p, the reform program is good so no more costs need to be paid afterwards. But with probability l-p the program is bad, which is discovered after one period of change. Then a new program is tried in the next period. Because the managers need to be retrained for matching attributes, an additional cost of 2C is paid in the next period. Therefore, we should have Cm2= 2C +d(1-p)cm?To illustrate how our framework works, let us look at an example of enter￾prise reform in transition. In the U-form, the reform is organized by specialized ministries, each ministry being responsible for either enterprise restructuring or the social safety net, and the national government is responsible for matching the attributes between enterprise restructuring and the social safety net. It is possible that there will be bad coordination between layo! policies and the creation of the social safety net, leading to riots. For example, the rules for eligibility set at the national level may be completely inappropriate in some important regions which have a concentration of older workers, but the national rule for pension eligibility does not make workers close to pension age eligible for any bene"ts. In the M-form, the reform is organized by regions, each regional government being responsible for matching the attributes between enterprise restructuring and the social safety net in its own region. Under this type of organization, layo! policies and the institution of social safety nets can be better coordinated within each region so that riots can be prevented. 3. M-form vs. U-form We "rst compare the performances of the U-form and the M-form in the case of a &big bang' reform where two complementary reforms 1 and 2 are imple￾mented simultaneously in regions A and B. Under the M-form, every unit manager will be responsible for matching the attributes of the two tasks within his unit. With perfect local information, attribute matching under the M-form will be performed perfectly. If a program is good, which happens with probabil￾ity p, the total payo! from the two units is A/(1!d). If a program is bad, which happens with probability 1!p, the current payo! is zero, and a new program will be tried in the next period. Therefore, the expected payo! of continued reform in an M-form is n .2 "pA/(1!d)#(1!p)dn.2 or n .2 "pA/M(1!d)[1!(1!p)d]N. On the cost side, in period 1, 2C is paid because two managers are involved in coordination. With probability p, the reform program is good so no more costs need to be paid afterwards. But with probability 1!p the program is bad, which is discovered after one period of change. Then a new program is tried in the next period. Because the managers need to be retrained for matching attributes, an additional cost of 2C is paid in the next period. Therefore, we should have c .2 "2C#d(1!p)c .2 1090 Y. Qian et al. / European Economic Review 43 (1999) 1085}1094