Contract enforcement efficiency and corporate vertical specialization: Evidence from a quasi-natural experiment of “announcement of dishonest persons” in China

Abstract

The role of contracting institutions, particularly the contract enforcement efficiency in shaping corporate vertical boundaries, has been largely overlooked. Using a quasi-natural experiment of the policy of “Announcement of Dishonest Persons” in China, we find that improved contract enforcement efficiency significantly promotes corporate vertical specialization, reflected in the improvement of corporate vertical specialization after the policy implementation. Reduction of transaction costs is the plausible mechanism. Moreover, the above impact is more pronounced when the exposure of firms to Laolai partners (i.e., the policy target), is higher. Finally, we find that efficient contract enforcement promotes total factor productivity through facilitating vertical specialization. This study identifies the causality between contracting institutions and corporate vertical specialization and extends research on consequences of the policy of “Announcement of Dishonest Persons”.