Supply‐Induced Litigation and the Role of Informal Institutions

ABSTRACT Access to legal services is argued to be an integral part of inclusive growth. This paper examines how litigation demand responds to an increased supply of legal professionals, that is, supply‐induced litigation, in a developing economy using a newly constructed city‐level panel dataset of litigation rate, law firms and socioeconomic variables from China throughout 2013–23. Our empirical analysis reaches several conclusions. We find that an increase in the number of law firms has a positive and significant effect on the litigation rate, which supports supply‐induced litigation. This result is robust to the instrument variable (IV) estimation and several robustness checks. Further, we find that the supply‐induced litigation potentially attributes to a better matching between lawyers and clients. Finally, we find that supply‐induced litigation is more pronounced for cities with higher social trust. In other words, formal and informal institutions, such as social trust, are complementary in driving the use of the judicial system.