876 JOURNAL OF POLITICAL ECONOMY total factor productivity rose 36 percent(Groves et al. 1994). Not all of this improvement in productivity is attributable to the particular reforms that we investigate here. Firms also faced increased product market discipline because of greater competition from other state firms and from new, nonstate firms, and this was an important source of productivity gains(McMillan and Naughton 1992). Gains also came from granting firms autonomy in their output decisions and increas- ing the share of profits firms were allowed to retain(Groves et al 1994). Managerial reforms would probably not have been effective had they not been made in conjunction with increased autonomy and increased product market competition Section II describes the selection of managers and the changes the overall environment within which Chinese managers operate since the reforms of the 1980s. Section Ill presents and interprets the main empirical results Section IV summarizes the findings and presents further speculations on the process of change in China. The Appendix provides details of our data set and the basic model speci- II. Selection of Managers and reforms of the 1980s In the prereform Chinese command economy, enterprises are best thought of as branch plants of a single giant firm. Enterprise manag ers were hired and fired by officials in the industrial bureaus, which vere in turn organized into sectoral and geographical divisions. The entire industrial system was accountable to a national or regional planning commission, which steered the entire system through a com- plex system of highly specific commands that extended all the way down the hierarchy to managers at the plant level. Authority relations were complicated by the intrusive role of the Communist Party, which functioned more or less as the personnel department of this enor mous corporation, maintaining dossiers and tracking managerial ca- reers. Managers were rewarded for following orders and for subservi- ence to political dogma. The inefficiency of which this system wa able is well know During the 1980s, China sought to improve industrial efficiency I Production function estimates from several other data sets also show increases in state firms' productivity. Gordon and Li(1989), using a sample of 400 state er by 4.6 percent Dollar(1990), using a sample of 20 state ent data, estimated that productivity rose between 1. 9 over the period 1978-88. See also Perkins(1988), Hay and Liu(1991), and jeffers Rawski, and Zheng (1992)