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

77 Pages Posted: 31 Aug 2022

See all articles by Ernest Liu

Ernest Liu

Princeton University

Yi Lu

Tsinghua University

Wenwei Peng

Harvard University

Shaoda Wang

University of Chicago

Date Written: August 30, 2022

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.

Keywords: judicial independence, local protectionism, economic integration

JEL Classification: K00, P48, R11

Suggested Citation

Liu, Ernest and Lu, Yi and Peng, Wenwei and Wang, Shaoda, Judicial Independence, Local Protectionism, and Economic Integration: Evidence from China (August 30, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-120, Available at SSRN: https://ssrn.com/abstract=4205091 or http://dx.doi.org/10.2139/ssrn.4205091

Ernest Liu

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Yi Lu

Tsinghua University ( email )

Beijing, 100084
China

Wenwei Peng

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Shaoda Wang (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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