Contract Enforcement Revisited

Abstract

There is now a wealth of literature on the role of contract enforcement in relation to economic development around the world. Attention given to the law in China’s economic development, however, remains inadequate. Most economists interested in Chinese economic development have devoted their major energy to the role of government(s). Other economists assume away the issue on whether the law has played any meaningful role in China’s economic development. Some leading Chinese or Asian law scholars also downplay the role of law in China’s economic development. The increasing number of civil litigation and the growing litigation rate of contractual cases during China’s economic transition, however, suggest that the role of law and enforcement in China’s economic development has been underestimated. If the formal law and enforcement, compared with informal means of contractual arrangements and enforcement, reduce transaction costs, many unprofitable exchanges under the informal mechanisms become legal and profitable. If this is indeed the case, more transactions will be carried out. This, in turn, will lead to greater investment. While this research is not able to demonstrate quantitatively these linkages, the results do provide some limited evidence on the linkages qualitatively. A major contribution of this study is that formal contractual mechanisms have clear comparative advantage in protecting contractual expectation and in solving disputes as far as business firms are concerned.