Banking on the Confucian Clan: Why China Developed Financial Markets So Late

<p>Over the past millennium, China has relied on the Confucian clan to achieve interpersonal&nbsp;<br> cooperation, focusing on kinship and neglecting the development of impersonal institutions&nbsp;<br> needed for external finance. In this paper, we test the hypothesis that the Confucian clan and&nbsp;<br> financial markets are competing substitutes. Using the large cross-regional variation in the&nbsp;<br> adoption of modern banks, we find that regions with historically stronger Confucian clans&nbsp;<br> established significantly fewer modern banks in the four decades following the founding of&nbsp;<br> China&rsquo;s first modern bank in 1897. Our evidence also shows that the clan continues to limit&nbsp;<br> China&rsquo;s financial development today.</p>