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Does the Rights Hypothesis Apply to China?

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  • Cheryl Xiaoning Long

Abstract

Using firm-level data from a World Bank survey, this paper examines how legal development in China relates to various firm decisions. I find that a more active court system is associated with more investment, more adoption of technology, more innovation, and more complex transactions. Specifically, when a higher percentage of business disputes are resolved through the court system, firms tend to have higher investment rates, higher propensities to adopt new automated technology, and higher probabilities of developing new products. In addition, they tend to have more nonlocal sales. These findings are consistent with a sophisticated version of the rights hypothesis, in which the rule of law eventually replaces relation-based governance as a superior governance mechanism. I find two limitations of China's legal system. The court system does a better job facilitating the growth of state-owned enterprises than of private firms, and it protects local firms better than nonlocal firms.

Suggested Citation

  • Cheryl Xiaoning Long, 2010. "Does the Rights Hypothesis Apply to China?," Journal of Law and Economics, University of Chicago Press, vol. 53(4), pages 629-650.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/649031
    DOI: 10.1086/649031
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    Cited by:

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    11. Ng, Travis, 2013. "Information acquisition and institutions: An organizational perspective," Information Economics and Policy, Elsevier, vol. 25(4), pages 301-311.
    12. Lixin Colin Xu, 2011. "The Effects of Business Environments on Development: Surveying New Firm-level Evidence," The World Bank Research Observer, World Bank, vol. 26(2), pages 310-340, August.
    13. Fan, Joseph P.H. & Gillan, Stuart L. & Yu, Xin, 2013. "Innovation or imitation?," Journal of Multinational Financial Management, Elsevier, vol. 23(3), pages 208-234.
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    17. Long,Cheryl Xiaoning & Xu,L. Colin & Yang,Jin, 2020. "Business Environment and Dual-Track Private Sector Development : China's Experience in Two Crucial Decades," Policy Research Working Paper Series 9161, The World Bank.

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