Relational Incentives in Chinese Family Firms

Abstract

This paper mainly discusses the choice of managerial compensation contracts in Chinese family firms. Relation or guanxi in Chinese language is an important factor that should be considered because it can bring the shirking cost to the relation-based manager and the caring cost to the owner under Chinese-style differential mode of association (“chaxu geju”). Our theoretical analysis shows that under some conditions it is optimal for the owner to choose the efficiency wage contract, and that under other conditions it is optimal for the owner to choose the share-based incentive contract.

Key words: Managerial compensation, Efficiency wage contract, Share-based incentive contract, Relation (Guanxi), Chinese family firm.
JEL: L20, M21, J33.