“Endogenous Institutional Change: Rise of Private Manufacturing in China”

This paper proffers a theory of endogenous institutional change to explain the emergence of private manufacturing in China’s transition economy. First, we define a set of mechanisms capable of explaining how and under which conditions behavioral deviations build into cascades that reshape institutional frameworks from the “bottom up. ” Specifically, we argue that endogenous institutional change emerges from an interplay between three factors: the value advantage actors associate with decoupling from institutional equilibria, positive externalities derived from similar decoupling among one’s neighbors, and accommodation by state actors. We demonstrate our theory with an agent-based model. We then provide a detailed empirical illustration of our theoretical account with a comparative analysis of two municipalities in China’s Yangzi delta region