Abstract
Why do firms use formal contracts or relational contracts with their business partners? The paper uses survey data based on a large number of Chinese firms to uncover some important factors for why and when formal contracts or relational contracts are used. This study identifies geographical location as an important factor in affecting Chinese firms' contracting decisions. We find that a firm is more likely to use formal contracts with its clients and suppliers if they are located in a city different from the firm's main business location. We also find that larger (smaller) firms tend to adopt formal (relational) contracts. However, while the number of clients has a negative impact on a firm's adoption of formal contracts with its clients, the number of suppliers has a positive impact on its adoption of formal contracts with the suppliers.
Original language | English |
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Pages (from-to) | 423-431 |
Number of pages | 9 |
Journal | China Economic Review |
Volume | 21 |
Issue number | 3 |
Early online date | 27 Mar 2010 |
DOIs | |
Publication status | Published - Sept 2010 |
Externally published | Yes |
Funding
We thank the referee for his/her very helpful comments and suggestions. We also benefit from comments by Xinyu Hua, Qing Liu, and participants in various seminars and workshops in which earlier versions of this paper (under different titles) were presented. This project is financially supported by the Mrs. Li Ka Shing Fund of the University of Hong Kong .
Keywords
- Chinese firms
- Formal contracts
- Location
- Relational contracts