Judicial independence and entrepreneurship: Evidence from China's judicial independence reform

This study offers a causal evaluation of judicial independence reforms and their impact on entrepreneurship in an emerging transitional economy, exploiting China’s staggered judicial reform initiated in 2014. The reform fundamentally altered the governance of local courts by reallocating authority over judicial finances and personnel away from local governments, thereby limiting political interference in adjudication. We demonstrate that the reform significantly increased entrepreneurial activity, resulting in a 9.7% increase in new firm registrations in reform cities, with the effect remaining robust across alternative specifications. Mechanism analyses indicate that enhanced judicial independence constrains executive power, strengthens public trust, improves access to external finance, and promotes innovation. Moreover, the reform reshaped the composition of new entrants toward a more modern economy, with faster growth in private, contract-intensive, and high-tech firms. Overall, the findings highlight the role of judicial independence reforms and provide policy-relevant insights for developing countries seeking to strengthen legal institutions and support economic development.