Costs and Benefits of Relational Contracting in China’s Transition

This paper is an attempt to account for the social foundations of China’s economic transition from central planning to a market economy which is a process of the completion and perfection of markets. In the early stage of China’s transition, relational contracts and interlinked arrangements constitute effective substitutes for missing and imperfect markets. However, relational contracting is becoming more costly as China’s economy develops. Its costs include, diseconomy of scale, undermining the development of arm-length transactions and formal institutions, among others. There are two possible future trajectories of China’s reform. One possibility is that the markets are so developed so that they are dis-embedded from sociopolitical powers. A second is that the markets are less developed and embedded in sociopolitical powers.