Over the past millennium, China has relied on the Confucian clan to achieve interpersonal cooperation, focusing on kinship and neglecting the development of impersonal institutions needed for external finance. In this paper, we test the hypothesis that the Confucian clan and financial markets are competing substitutes. Using the large cross-regional variation in the adoption of modern banks, we find that regions with historically stronger Confucian clans established significantly fewer modern banks in the four decades following the founding of China's first modern bank in 1897. Our evidence also shows that the clan continues to limit China's financial development today.
1 May 2022
The Economic Journal