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Judicial Independence, Local Protectionism, and Economic Integration: Evidence from China

Author

Listed:
  • Ernest Liu
  • Yi Lu
  • Wenwei Peng
  • Shaoda Wang

Abstract

We show that judicial independence can reduce local protectionism and foster cross-regional economic integration. We exploit a judicial independence reform in China with staggered roll-out since 2014. The reform removed local governments’ control over local courts’ financial and personnel decisions, thereby substantially improving local courts’ independence. Combining novel data on the universes of civil lawsuits and business registration records, we show that local defendants’ rate of winning court cases against non-local plaintiffs declined by 7.0% after the reform. The effect is mainly driven by improvements in the quality of judicial decisions and is more salient for politically connected local defendants. Over time, the reduction in local protectionism encouraged smaller non-local firms to file lawsuits against larger local firms. Using the shareholding network extracted from business registration records, we find that the decline in local protectionism could attract 8.4% more inward investment flows into reformed localities. This has the potential to increase China’s GDP by 2.3% when the judicial independence reform is implemented nationwide.

Suggested Citation

  • Ernest Liu & Yi Lu & Wenwei Peng & Shaoda Wang, 2022. "Judicial Independence, Local Protectionism, and Economic Integration: Evidence from China," NBER Working Papers 30432, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30432
    Note: DEV ITI LE PE POL PR
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    Cited by:

    1. Xiao, Yangao & Han, Nianchen & Li, Rui & Ran, Huaqing & Zhou, Shihao & Tong, Tony W., 2024. "Trademarks and firm market value: Evidence from new trademark-firm linked data in China," Research Policy, Elsevier, vol. 53(2).
    2. Yang, Laifeng & Wang, Qing Sophie & Lai, Shaojie, 2023. "Fair and square: The impact of judicial independence on entrepreneurship," Finance Research Letters, Elsevier, vol. 55(PB).
    3. Lai, Shaojie & Yang, Laifeng & Wang, Qing & Anderson, Hamish D., 2023. "Judicial independence and corporate innovation: Evidence from the establishment of circuit courts," Journal of Corporate Finance, Elsevier, vol. 80(C).
    4. Xue, Xizi & Yang, Hao & Yang, Xuan & Zhang, Jiahao & Zhao, Xiaofang & Wang, Yihui, 2023. "Judicial independence and corporate employment: Evidence from China," Finance Research Letters, Elsevier, vol. 58(PC).

    More about this item

    JEL classification:

    • K0 - Law and Economics - - General
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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