Career Incentives and Employee Productivity in State-Owned Enterprises: Evidence from India

Abstract

State-owned enterprises (SOEs) are large and important organizations in many economies but suffer from low labour productivity. Can SOEs improve their labour by enhancing career concerns for their employees? We show that exogenous change in opportunities to influence career progression significantly improves the performance of employees of state-owned banks in India. In particular, we find that when banking employees get more exposure to senior management, who can influence their promotion decisions, they increase credit expansion on both intensive and extensive margins. Further, this expansion happens through increased productivity, and not costly factors such as liberal screening, lower interest rates or higher resource allocation. Our results show that reforms in performance review processes, which allow workers to signal effort to supervisors in state-owned firms, may yield substantial productivity gains.