Cultural border, administrative border, and regional economic development: Evidence from Chinese cities

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 protectionism to 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.