Perverse Complementarity: Political Connections & the Use of Courts Among Chinese Firms

Abstract:     
We examine whether and how political connections influence the use of courts in transitional and authoritarian settings using survey data of over 3,900 private firms in China. Although political connections are normally associated with “using the back door,” we find that politically connected firms are more inclined than unconnected firms to use courts over informal means of dispute resolution. Our finding raises a more challenging question: Are politically connected firms more likely to litigate because of their advantages in “know-how” (knowledge of navigating courts) or “know-who” (political influence over adjudication)? By manipulating regional institutional variance as moderators, we find evidence that political advantage dominates knowledge advantage in linking political connections to the use of courts, implying a relationship of perverse complementarity. This finding suggests that expansion of formal institutions may not necessarily erode informal networks; instead, the latter can embolden market actors to seize the advantage of the legal system. *Both authors contributed equally to the paper*

Number of Pages in PDF File: 37

Keywords: Informal institutions, networks, rule of law, political connections, dispute resolution, private firms, China

working papers series