The Authoritarian Rule of Law Through Centralization: Evidence from China

• In Event: Chinese Politics Mini-Conference: The Political Economy of State-Business Relations

Abstract

Existing research provides strong evidence that political centralization reduces elite capture and improves local public goods provision. Nevertheless, an under-studied question is whether political centralization reduces local governments’ protection for the interests of their local firms (i.e., local protectionism). This question is particularly crucial for a deeper understanding of political centralization because reducing local protectionism is often cited as a primary reason for introducing centralization reforms.

We answer this research question by exploiting a natural experiment in the case of the judicial system in China. Since 2014, the Chinese government has gradually removed city and county governments’ control over city-level and county-level courts (i.e., intermediate and basic people’s courts), centralizing such power into the hands of the provincial government. By centralizing the personnel management and fiscal control of lower level courts, the aim of this reform is to eliminate the influence of local governments on judicial trials, and thus, “de-localizing” the judicial institutions. We argue that centralization can reduce the likelihood of local firms winning against non-local firms in intermediate and basic people’s courts; whereas on the other hand, new problems can arise for the enforcement of court rulings. This is because enforcement often still requires the cooperation of local politicians and agencies, who can be reluctant to cooperate when court rulings may harm the interest of their local firms after centralization.

To test these arguments, we collected original litigation data of all publicly listed firms in China from 2012 to 2018. Applying a difference-in-differences (DID) approach as the identification strategy, we provide empirical evidence supporting our argument: 1) More litigations between local and non-local firms are brought to the court after the centralization reform of judicial institutions; 2) Local firms are less likely to win in intermediate and basic people’s courts after the reform. Nevertheless, court rulings against the interest of local firms tend to be enforced with longer delays and lower quality. These findings are robust to different measurements for the judicial outcome, and we also conducted a series of placebo tests to check the validity of our findings.

Our paper not only contributes to the literature on centralization (Gennaioli & Rainer, 2007; Malesky et al., 2014; Beazer, 2014; Boffa et al., 2015; Bo, 2019; Paik & Vechbanyongratana, 2019) and how it addresses the limitations of a decentralized system (Bardhan & Mookherjee, 2000; Bardhan, 2002), but also help deepens our understanding on how the judicial system works and coordinates with other repressive state apparatuses in China (Ang & Jia, 2014; Wang, 2018). To our best knowledge, this is also the first paper to evaluate the impact of this recent judicial reform on local protectionism and the enforcement of court rulings.

Authors

• Yishuang Li, New York University

• Zhenhuan Lei, New York University