Lizhi Liu, Georgetown University
Discussant: Tao Lin, Political Science UW Graduate Student
A central question in political economy asks: how do developing states build market-supporting institutions (e.g., secure property rights, contract enforcement, and the rule of law)? Too often, political obstacles prevent developing states from adopting strong formal institutions. I propose that China has devised a novel solution to this political problem: institutional outsourcing. I argue that, with weak rule of law, the state has outsourced part of its institutional functions to key private actors -- digital platforms. Using as the context China’s e-commerce market, where 700 million active users generate more than 70 million transactions per day, I show that online trading platforms (e.g., Alibaba’s Taobao.com and Tmall.com) have developed strong private institutions to substitute for formal institutional support. More specifically, platforms privately supply market-supporting institutions to enforce contracts, prevent fraud, and settle disputes. Not only do platforms enforce rules, but they also assist the state in creating and reforming formal institutions through institutional experiments. I demonstrate that institutional outsourcing is a more politically viable solution to market failure and governance deficit than the direct reforming of formal institutions, at least in some areas. Apart from institutional effects, e-commerce also has development implications. Combining a randomized control trial with a new survey and administrative microdata, I show how e-commerce affects rural household welfare. This talk provides an overview of an ongoing book project on the political economy of China's e-commerce development.