The Ratchet: A dynamic managerial incentive model of the soviet enterprise

The impact of the ratchet on the level of output that maximizes the present value of the managerial bonus stream is investigated. Using the orthodox USSR incentive scheme, results indicate that the ratchet does not always cause managers to select an output level that is less than the enterprise's full capacity. Nonetheless, the ratchet typically requires maximizing behavior that prevents production at capacity. The results reported for only two periods apply to longer horizons.