Abstract
The institution of contract law is paramount to economic development. Theories of new institutional economics suggest that extralegal influences on court adjudications are symptoms of less developed legal institutions. Theories of economic sociology argue that legal institutions are always deeply embedded in the social fabric of the environment, regardless of their independence from other branches of the government. Combining these two perspectives, we contend that with legal development, the locus of extralegal influences on court outcomes shifts from politically embedded litigants to relationally embedded attorneys. Leveraging over 110,000 first-instance court decisions on contract disputes among private corporate litigants in China between 2014 and 2019, we found that in comparison to corporate litigants in less legally developed regions, those in more legally developed regions benefit more from legal representation. Using the introduction of circuit court as an exogenous policy shock, we found causal evidence that the relational embeddedness effect is better explained by local knowledge coordination on legal interpretations. And it cannot be explained by either collusions or corruption between lawyers and judges, or changes in courts’ dispute resolution preferences after the policy shock. The findings support our propositions that legal development pushes the transition from bureaucratic courts to professional courts and fosters the formation of judicial field as an alternative social structure for informal connections.