Judicial quality, contract intensity and exports: Firm-level evidence

- Judicial quality affects firms' exports through settling business contract dispute.
- Firms source relationship-specific intermediate inputs (contract-intensive).
- Regions with better judicial quality will have comparative advantage.
- We study this issue using export data of firms in China.
- We find that judicial quality affects firms' export and more so for foreign firms.

Judicial quality affects firms' exports through its efficiency in settling business contract disputes (transaction costs). Firms in regions with better judicial quality will have a comparative advantage in exporting the goods that source heavily relationship-specific intermediate inputs (contract-intensive), due to cost saving from efficient dispute settlement system. We study this issue using export data of over 77,000firms across 30 provinces in China. We explicitly control for firm heterogeneity of self-selection into exporters, and firm heterogeneity in their responses to judicial quality. We find that firms operating in provinces with better judicial quality export more products that require relationship-specific intermediate inputs, and judicial quality is most important for foreign-owned firms.