| Content | Current province-level administrative division in China breaks the distribution of local culture and
many cities are separated from their respective local culture regions to locate in other provinces.
These cities encounter potential cultural conflicts with the mainstream culture of the provinces
they belong to, but also face various local protectionism barriers with cities in the neighboring
province that share the same border and local culture with them. As a result, transaction costs
could be higher whichever side they trade with, leading to potential harm to their economic
development. Using dialect as a proxy for local culture, we find that the cultural segmentation
caused by the misalignment between cultural and administrative borders can significantly
hamper economic development of the segmented cities. This negative effect is aggravated by
greater local protectionism in neighboring provinces but alleviated by a longer history of being
administrated by the same province with the current provincial capital. These findings support
the hypothesis that cultural and administrative border misalignment works together with local
protectionismto bring about substantial economic loss. The results thus highlight the importance
of both formal and informal institutions in affecting transaction costs and economic growth, and
also shed light on the potential interactions between the two types of institutions. |
