Relational Contracts in China: Relational Governance and Contractual Assurance

Abstract

What enforces contracts in emerging economies such as China, in which the legal system is weak, yet the use of contracts is still prevalent? We offer that relational governance, a social institution, provides contractual assurance. We develop this perspective and empirically examine whether relational governance functions as a substitute for, or supplement to, weak formal enforcement—the courts—and thus promotes the use of contracts in China. Our findings broadly support this perspective: increasing levels of uncertainty and asset specificity are met with higher levels of relational governance, which in turn promotes greater contract customization. (For more information, please contact: Kevin Zheng Zhou, University of Hong Kong, Hong Kong: kevinzhou@business.hku.hk)