LAUSR

Abstract This paper examines the role of clans in China's unprecedented development of the private sector. Although with no well-developed financial and legal systems, China witnesses a boom of private sector, which has contributed to most of its economic growth during the past three decades. Using inter-census population survey and economic census data, I find that the clan is positively associated with the likelihood of entrepreneurship and the share of economy in the private sector. Exploring possible mechanisms, I find that the clan helps privately-owned enterprises overcome financing constraints and escape from local government's “grabbing hand”. In addition, the clan is significantly related to a set of individual values, which are arguably relevant for private business. Finally, I find that the support of clans for private business is limited as clans deter private businesses from growing into large firms. The results also suggest that the role of clans reduces as formal institutions develop.