Judicial institutions, local protection and market segmentation: Evidence from the establishment of interprovincial circuit tribunals in China

Abstract

A central challenge in economic development is market segmentation (MS) within countries, which largely arises from judicial local protection(JLP). By taking advantage of China's establishment of interprovincial circuit tribunals (ICTs) that separate the judicial system from local governments, we find that: (1) ICTs significantly rectify the JLP provided by lower-level courts. (2)A micro-mechanism analysis shows that ICTs decrease transportation costs of cases involving small and private enterprises as plaintiffs and increase their probability applying for retrials in the Supreme People's Court (SPC). In combination with the fact that these enterprises are more likely to be discriminated against by lower-level courts, the rectification effect of ICTs becomes significant after the reform. (3)Consistently, although ICTs significantly decrease the MS between provinces within the same circuit area, the MS between provinces of different circuit areas barely changes. Our paper provides timely implications and potentially actionable insights for countries facing similar concerns.