Adaptive Efficiency and Financial Development in China: The Role of Contracts and Contractual Enforcement

Abstract

The existing literature on China’s economic development focuses more on economic reform, decentralization, and the clarification and protection of property rights. There is inadequate attention being paid to the adaptive efficiency of economic actors in general and in experimenting with informal and formal contractual arrangements in particular. In this article, Guanghua Yu and Hao Zhang document and analyze the informal contracts developed in Wenzhou and three formal contractual arrangements increasingly in wide use in China. They argue that both informal and formal contractual mechanisms play important roles in China’s economic development. The general pattern appears to be that economic actors rely on self-enforcing informal contractual arrangements first and adopt more formal arrangements when these are feasible. By focusing their analysis on the development and adaptation of selected contractual arrangements, they submit that the process of legal development in China is consistent with the notion of adaptive efficiency. The implication from their study is that the development of a formal contract regime will become more important as economic development reaches a more advanced stage. When economic actors are able to rely on more formal contractual arrangements, more complex, risky transactions with higher technological content will be pursued.