Formalizing informal institutions: How does China's credit regulation affects entrepreneurial spirit?1

Based on institutional economics, we develop a theoretical framework to examine the relationship between credit regulation and entrepreneurial spirit. We demonstrate that credit regulation significantly promotes both entrepreneurship and innovative spirit. Mechanism tests indicate that credit regulation is associated with a reduction in institutional transaction costs, evidenced by decreased government confiscation income and improved government-business relationships. It is also linked to a decline in market-based transaction costs, as reflected by increased regional commercial credit acquisition and technology contract transactions. The reduction in transaction costs enhances entrepreneurs' expectations of future returns from productive activities, ultimately fostering entrepreneurial spirit. Finally, we document that this positive impact is more pronounced in eastern regions, in cities with advanced digital economy development, and in stranger society societies. Our study confirms that, in the context of imperfect institutional structures in emerging markets, the formalization of credit represents a crucial institutional innovation for stimulating the dynamism of market participants.