Making Local Courts Work: The Judicial Recentralization Reform and Local Protectionism in China

Abstract

Although the rule of law plays a key role in effective governance, we still know relatively little about the institutional foundation for the independence and operation of local judiciaries. Crucially, is a decentralized court system, where local governments appoint judges and finance the court budget, more conducive to the autonomy of courts than a more centralized court system that allows higher-level governments to control local judiciaries? We answer this question by investigating a reform in China that gradually recentralizes the control of local courts. Applying a difference-in-differences design over a unique dataset of listed firms' lawsuits in 2012-2018, we find that re-centralization reduces a prominent form of judicial bias in China, namely, the advantage of local litigants, after local courts become fiscally and politically independent from prefectural and county governments. These results demonstrate that re-centralization helps local judiciaries resist the influence of parochial interests and improve the court's independence.

Keywords: China, recentralization, judicial independence, rule of law