Political Connections & Use of Courts in Dispute Resolution: a Survey Analysis of Chinese Private Firms

Abstract: What is the relationship between formal laws and informal networks? Do market transition and expansion of a formal legal system imply the declining significance of interpersonal connections, especially ties to the state? Addressing these broad themes, we examine the relationship between political connections and use of courts in dispute resolution among Chinese firms, using survey data of over 4,000 privately owned companies. We find that politically connected firms are more likely to adopt litigation over alternative means of dispute resolution than non-connected firms, holding all things equal. Going further, by exploiting variance in provincial-level legal services capacity as a moderator, our evidence suggests that the positive link between political connections and use of courts is driven primarily by political advantages of connected firms in exercising influence and secondarily by their informational advantages of the legal system. Collectively, our findings imply a perversely complementary relationship between political connections and willingness to utilize official avenues of adjudication. While use of and demand for courts may come primarily from politically connected firms, such demand may not equate a demand for judicial fairness and independence.