IDEAS home Printed from https://ideas.repec.org/a/eee/chieco/v66y2021ics1043951x21000018.html
   My bibliography  Save this article

The legal environment, specialized investments, incomplete contracts, and labor productivity

Author

Listed:
  • Li, Junqing
  • Miao, Ersen
  • Zhang, Jianbo

Abstract

This paper provides a framework for analyzing the interactions among legal environments, incomplete contracts and specialized investments. It is well known that providers of specialized investments may be taken advantage when the contract is incomplete, thus an improvement in legal environments may be able to better protect those specialized asset investors and provide them with stronger incentive for specialized investments hence promote the overall level of specialization of the economy and enhance labor productivity. (1) We use the data set from IEDB(Industrial Enterprises Data Bank) of China to capture this effect. It is found that legal environment improvement does enhance the labor productivity through encouragement of specialization. This effect is robust under different settings in assumptions of endogeneity, heterogeneity and measurements of productivity index. (2) Heterogeneity analysis shows that a bigger market scale does encourage deeper specialization, more specialized investments, and thus improving the labor productivity. (3) The above conclusion holds up not only at the micro (firm) level but also at the macro level of the economy. The labor productivity increase happens with the growth of an industry along with deeper specialization and better legal environments.

Suggested Citation

  • Li, Junqing & Miao, Ersen & Zhang, Jianbo, 2021. "The legal environment, specialized investments, incomplete contracts, and labor productivity," China Economic Review, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:chieco:v:66:y:2021:i:c:s1043951x21000018
    DOI: 10.1016/j.chieco.2021.101583
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1043951X21000018
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.chieco.2021.101583?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2006. "Distance to Frontier, Selection, and Economic Growth," Journal of the European Economic Association, MIT Press, vol. 4(1), pages 37-74, March.
    2. Gopalan, Radhakrishnan & Kadan, Ohad & Pevzner, Mikhail, 2012. "Asset Liquidity and Stock Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(2), pages 333-364, April.
    3. Joel M. David & Venky Venkateswaran, 2019. "The Sources of Capital Misallocation," American Economic Review, American Economic Association, vol. 109(7), pages 2531-2567, July.
    4. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    5. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    6. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
    7. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(1), pages 83-116.
    8. Vogel, Jonathan, 2007. "Institutions and moral hazard in open economies," Journal of International Economics, Elsevier, vol. 71(2), pages 495-514, April.
    9. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June.
    10. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    11. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    12. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    13. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 569-600.
    14. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    15. Avinash Dixit, 2009. "Governance Institutions and Economic Activity," American Economic Review, American Economic Association, vol. 99(1), pages 5-24, March.
    16. Schwartz, Alan, 1992. "Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies," The Journal of Legal Studies, University of Chicago Press, vol. 21(2), pages 271-318, June.
    17. Yue Maggie Zhou & Xiang Wan, 2017. "Product variety and vertical integration," Strategic Management Journal, Wiley Blackwell, vol. 38(5), pages 1134-1150, May.
    18. Daron Acemoglu & Simon Johnson & Todd Mitton, 2009. "Determinants of Vertical Integration: Financial Development and Contracting Costs," Journal of Finance, American Finance Association, vol. 64(3), pages 1251-1290, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Junqing & Yang, Zhiyuan & Liu, Kaifeng, 2024. "Research on contracting institutions and convergence," China Economic Review, Elsevier, vol. 84(C).
    2. Qi, Xiulin & Wu, Zhifang & Xu, Jinqing & Shan, Biaoan, 2023. "Environmental justice and green innovation: A quasi-natural experiment based on the establishment of environmental courts in China," Ecological Economics, Elsevier, vol. 205(C).
    3. Chen, Xuchang & Wu, Changqi, 2023. "Subnational social trust and the internationalization of emerging market firms," Journal of Business Research, Elsevier, vol. 158(C).
    4. Du, Longzheng & Lin, Weifen, 2022. "Does the application of industrial robots overcome the Solow paradox? Evidence from China," Technology in Society, Elsevier, vol. 68(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Das, Joy & Tanger, Shaun & Fannin, J. Matthew & Kennedy, P. Lynn, 2020. "Institutional Determinant of Market Concentration and Trade in a General Equilibrium Setup," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304458, Agricultural and Applied Economics Association.
    2. Lopez-Martin, Bernabe & Perez-Reyna, David, 2021. "Contracts, firm dynamics, and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    3. Ferguson, Shon & Formai, Sara, 2013. "Institution-driven comparative advantage and organizational choice," Journal of International Economics, Elsevier, vol. 90(1), pages 193-200.
    4. Andrei A. Levchenko, 2013. "International Trade and Institutional Change," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(5), pages 1145-1181, October.
    5. Liang, Yan, 2022. "Impact of financial development on outsourcing and aggregate productivity," Journal of Development Economics, Elsevier, vol. 154(C).
    6. Chen, Binkai & Lin, Justin Yifu, 2021. "Development strategy, resource misallocation and economic performance," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 612-634.
    7. Martin Strieborny & Madina Kukenova, 2016. "Investment in Relationship-Specific Assets: Does Finance Matter?," Review of Finance, European Finance Association, vol. 20(4), pages 1487-1515.
    8. Gregory Corcos & Delphine M. Irac & Giordano Mion & Thierry Verdier, 2008. "The Determinants of Intra-Firm Trade," Development Working Papers 267, Centro Studi Luca d'Agliano, University of Milano.
    9. Juan Carluccio & Thibault Fally, 2012. "Global Sourcing under Imperfect Capital Markets," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 740-763, August.
    10. Gregory Corcos & Delphine M. Irac & Giordano Mion & Thierry Verdier, 2013. "The Determinants of Intrafirm Trade: Evidence from French Firms," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 825-838, July.
    11. Altomonte, Carlo & Rungi, Armando, 2013. "Business Groups as Hierarchies of Firms: Determinants of Vertical Integration and Performance," Economy and Society 148920, Fondazione Eni Enrico Mattei (FEEM).
    12. Marcella Nicolini, 2007. "Institutions and Offshoring Decision," CESifo Working Paper Series 2074, CESifo.
    13. Eppinger, Peter S. & Kukharskyy, Bohdan, 2017. "Contracting institutions and firm boundaries," University of Tübingen Working Papers in Business and Economics 100, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    14. Stiebale, Joel & Vencappa, Dev, 2022. "Import competition and vertical integration: Evidence from India," Journal of Development Economics, Elsevier, vol. 155(C).
    15. Ottaviano, Gianmarco, 2007. "Contract Enforcement, Comparative Advantage and Long-Run Growth," CEPR Discussion Papers 6419, C.E.P.R. Discussion Papers.
    16. Azmat Gani, 2018. "Contract Enforcement and Trade," Journal of Industry, Competition and Trade, Springer, vol. 18(1), pages 107-119, March.
    17. Firat Demir & Chenghao Hu, 2020. "Destination institutions, firm heterogeneity and exporter dynamics: empirical evidence from China," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(1), pages 183-217, February.
    18. Essaji, Azim & Fujiwara, Kinya, 2012. "Contracting institutions and product quality," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 269-278.
    19. Eppinger, Peter & Kukharskyy, Bohdan, 2021. "Contracting institutions and firm integration around the world," European Economic Review, Elsevier, vol. 137(C).
    20. Peter Eppinger & Hong Ma, 2023. "Optimal Ownership and Firm Performance: An Analysis of China’s FDI Liberalization," CESifo Working Paper Series 10551, CESifo.

    More about this item

    Keywords

    Legal environment; Incomplete contracts; Specialized investments; Mediation effect.;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:chieco:v:66:y:2021:i:c:s1043951x21000018. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/chieco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.