Does the Rights Hypothesis Apply to China?
Posted: 10 Sep 2009
Date Written: September 9, 2009
Using firm-level data from a World Bank survey, this paper studies how legal development in China relates to various firm decisions and obtains the following results. A more active role of the court system is associated with more investment, more technology adoption, more innovation, and more complex transactions in China. Specifically, when a higher percentage of business disputes are resolved through the court system, firms tend to have higher investment rate, higher probability of adopting new automation technology, and higher probability of developing new products. In addition, they tend to have more non-local sales. These findings are consistent with a sophisticated version of the Rights Hypothesis, where rule of law eventually replaces relation-based governance to emerge as the superior governance mechanism.
Keywords: Rule of law, legal reform, the Rights Hypothesis, property
JEL Classification: K00, O12, P26
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