Mathematical modeling of China's State-owned Enterprises' Contract System

Abstract The Chinese government has adopted a policy to separate the management and ownership of the state-owned enterprises as a key step to move them towards modern-type enterprises. State-owned Enterprises' Contract System (SECS) is a major enterprise management system in China today. In this paper, mathematical models are employed to examine some macro aspects of SECS. First, the behavior of SECS is analyzed through introducing two measurement indices; second, two incentive models of SECS are developed using audit as a tool for acquiring information for decision making; third, from a mathematical analysis, a general rule which determines optimal incentive strategy under perfect information is presented.