Contracting Institutions and Vertical Integration: Evidence from Chinas Manufacturing Firms

The existing studies on vertical integration focus on factors at the transaction partieslevel, such as asset speci\u85city and contractual in-completeness. What is overlooked is the quality of the underlying institutions, in particular, contracting institutions. In this paper, us-ing a World Bank data set of manufacturing \u85rms in China, we \u85nd that poorer contracting institutions cause \u85rms to be more vertically integrated. Our results are robust to various checks, especially the inclusion of the quality of \u85nancial institutions