THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1999 Textile University during the time period our tegic play than the other subject groups and experiments were run, and the vast majority of never caught up. To compensate for this educa our manager sample earned less than 2, 000 tion effect, we simplified the procedures in two yuan per month ways. First, for each output level which was To test for the effects of expertise, we used actually selected by an F, the experimenter an- three subject populations: college students, nounced the Fs payoffs conditional on the CPs older managers, and younger managers. The responses and the payoffs of both CPs and Fs college students were from China Textile Uni- for these choices, so that subjects no longer had versity, which is considered a high-quality uni- to compute their own payoffs. Second, forms versity in China. (Less than 0.7 percent of for recording past play were eliminated, with Chinas population attend any university, and the entire history posted in several places (in China Textile University is considered a top 20 extremely large print), making it easier for sub university )Few of these students would have to see and think about the outcomes had any direct experience with the ratchet In addition, we recruited younger managers effect who were all university educated and under age Whenever possible all workers in China, in- 30. This group included graduate students at cluding foremen, are subject to product China Textile University who had spent at least plans. Therefore, all of the managers in our five years in factories before returning to the experiment should have had extensive field ex- university to obt a graduate (M. B A-type) perience with the strategic situation our ratchet degree and China Textile University alumni effect game was designed to capture. Older working in the area, with at least two years of manager sessions employed relatively high- experience. Thus, all of these subjects should ranking managers(some of whom partic- have had some experience as managers con- ipating in a two-year, part-time M. B A-style fronting the ratchet effect. Because all of these program at China Textile University), mid-level managers were relatively recent college gradu toies operating in Shanghai. About 25 percent the education effec bect them to be subject to managers, and senior foremen from textile fac- ates, we would not ex of the older managers had university degrees; To capture the interaction between expertise another 48 percent had some post-high-school and context, we ran approximately half of the education, typically a two- or three-year degree sessions as generic sessions and half as context imilar to community college or trade school in sessions. Generic sessions employed the same the United States. Among those who had post- payoffs as the context sessions. The only differ high-school training, most had not been stu- ence was in the instructions. The instructions dents any time recently as 40 percent were over for generic sessions used abstract language the age of 50 and another 40 percent were designed to minimize the similarity between the between 40-50 years old. Moreover, age is experiment and field settings. In context inversely correlated with quality of formal ed- ucation in China (even for the college ed cated). These factors probably all contributed to Under our original procedures, Fs' payoff table in- a substantial education effect. I cluded two additional output choices attached to either the riginal procedures, older PRC beginning or end of Table 1. These choices were designed managers started out with substantially less str shift the precise location of the equilibrium between ssions(to offset possible information leakage across rep- inated by one or more of the outputs in Table 1. so heoa ot alter the The conversion rate was 0.0026 yuan= 1 franc after choices were climinated in the modified trcatments subtracting 18,000 francs from total earnings. This total iversity degree holders in China can become fore- included subjects' show-up fee. All sessions were con- men after six months of training. After one or two years. 12 All of the PRC manager sessions employed the san be in charge of a department in the firm. Average earn- n rate as the high-pay student sessions. Given the ings for the young managers abstantially higher than es of the managers(as compared to students), for the older managers, as many worked in joint venture these sessions might best be viewed as standard-pay ses- enterprises involving some private capital and some state enterprise or government capital