Contracting institutions and vertical integration: Evidence from Chinaメs manufacturing firms

Du, Julan, Lu, Yi, and Tao, Zhigang—Contracting institutions and vertical integration: Evidence from China’s manufacturing firms The existing studies on vertical integration focus on factors at the transaction parties’ level, such as asset specificity and contractual incompleteness. What is overlooked is the quality of the underlying institutions, in particular, contracting institutions. In this paper, using a World Bank data set of manufacturing firms in China, we find that poorer contracting institutions cause firms to be more vertically integrated. Our results are robust to various checks, especially the inclusion of the quality of financial institutions. Journal of Comparative Economics 40 (1) (2012) 89–107. Department of Economics, Chinese University of Hong Kong, Hong Kong; Department of Economics, National University of Singapore, Singapore; Faculty of Business and Economics, University of Hong Kong, Hong Kong. 2011 Association for Comparative Economic Studies Published by Elsevier Inc. All rights reserved.