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Firm Foundations: Legal Systems and Economic Performance in Colonial Shanghai, 1903–1934

How important are legal systems to economic performance? To address this question, I focus on a historical period from colonial Shanghai, where quite different legal systems operated in the International Settlement and French Concession. In particular, employing novel historical data, I examine 1903–1934 land value discontinuities at the border between them. Substantial discontinuities were found in the 1900s, with higher land values associated with the International Settlement. However, by the 1930s, this land value advantage of the International Settlement had disappeared. A closer look at the institutions reveals that the French Concession adapted its operation to be more business friendly, under competition from the neighboring International Settlement. This suggests that the French legal system per se was not a barrier to economic growth, but rather it could function well if interpreted and implemented properly. This paper thus adds to evidence that formal legal system is not a key determinant of economic performance.