Contract Enforcement Efficiency and Corporate Vertical Specialization : Evidence from a Quasi-Natural Experiment of “Announcement of Dishonest Persons” in China

The role of contracting institutions, particularly the role of contract enforcement efficiency in shaping corporate vertical boundaries, has been largely overlooked. Using a quasi-natural experiment of “Announcement of Dishonest Persons” in China, we find that improved contract enforcement efficiency significantly increases corporate vertical specialization, and the reduction of transaction costs is a plausible mechanism. Further, the trade credit environment improves with the contract enforcement efficiency increasing, which also supports that efficient contract enforcement could inhabit opportunism and reduce transaction costs. Finally, we find that efficient contract enforcement promotes the total factor productivity through facilitating corporate vertical specialization. This study successfully identifies a causal link between contracting institution and corporate vertical specialization, and confirms the dominant role played by contracting institution in shaping corporate vertical boundaries