"Whipping the fast ox" is a popular proverb in China. It means that the Chinese government will assign more demanding production or profit targets to high performance enterprises. Expecting this, Chinese managers have an incentive to restrict their current production, hide their surplus materials, or conceal their profitability to avoid revealing their enterprises' true capacity and generating more demanding targets in the future. This kind of behavior is the well-known dynamic incentive problem--the ratchet effect.; This dissertation is a pioneer research in the fields of experimental economics and comparative economic systems. This dissertation has enriched both fields by applying the advanced research technique of experimental economics to explore the essential elements of the strategic interactions between central planners and managers of industrial firms in a centrally planned economy.; Based on over 30 sessions of experiments conducted in Pittsburgh and Shanghai, this dissertation successfully demonstrated how the decision making of industrial managers and ordinary people is affected by the ratchet effect in an asymmetric information environment. This dissertation also found strong evidence for effects of institution, payment size, and experimental context on subject behavior. First, our Chinese student subjects behaved more strategically than our American student subjects when the experiment was explained in the context of planner-manager interaction. This indicates that there is a strong institutional effect and experimental subjects' choices are affected by their social-economic background. Second, payment size has significant influence on Chinese undergraduate students resulting in faster recognition of strategic choices in the ratchet effect game and more retreating behavior in the late periods of the experiment. Third, the context of experimental design has positive effects on our Chinese subjects which provides indirect evidence for the importance of the ratchet effect in the history of central planning in China. Contrary to our initial belief, we did not find significant managerial effect from our manager subjects. By carefully exploring the possible reasons, we found this surprising result was due to the lower education levels of older managers and the inadequate linkage between their field experience and the experimental designs.
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