1.1 Extralegal Governance and Lawlessness

How do private individuals mitigate risk and secure social cooperation? Thomas Hobbes, a seventeenth-century English philosopher, believed that life under anarchy was “solitary, poor, nasty, brutish and short” and people should contract with a leader and protector (i.e., the government) who would be able to remove people’s basic fears, such as violent death, wounding, and oppression, and protect them from inevitable anarchy (Hobbes Reference Hobbes1651). Hobbes’s ideas exerted a powerful influence for the next several hundred years (Powell and Stringham Reference Powell and Stringham2009). Law and economics scholars, in their early contributions, examined the ways in which anarchy undermines social cooperation and investigated the role of the government, especially “the institution and machinery of the state’s law,” in providing governance for economic activities and social cooperation (Dixit Reference Dixit2004: 2). For example, in the 1970s, public choice scholars such as Gordon Tullock, James Buchanan, Winston C. Bush, and Warren J. Samuels began their economic analysis of anarchy and published two edited volumes, Explorations in the Theory of Anarchy (1972) and Further Explorations in the Theory of Anarchy (1974). The early public choice analysis of anarchy shows that in a state of anarchy individuals would face the prisoner’s dilemma, cooperation would be limited, and government enforcement would be needed to safeguard long-term contracts and complex transactions.

In the early 1970s, the public choice economists’ overall perspective on anarchism “could be described as sympathetic, but ultimately pessimistic” (Powell and Stringham Reference Powell and Stringham2009: 508). Anarchy is perceived as an unstable outcome (Nozick Reference Nozick1974) and a solution to the prisoner’s dilemma is to create government law enforcement (Buchanan Reference Buchanan1974, Reference Buchanan1975). The state capacity literature examines two essential components of state capacity – fiscal and legal – and identifies the ability of a state to raise revenue, enforce laws and regulations, and provide “fundamental public goods, including defense, a legal framework, and some degree of productive investment” (Piano Reference Piano2019: 291; see also Acemoglu et al. Reference Acemoglu, Moscona and Robinson2016; Murphy and O’Reilly Reference Murphy and O’Reilly2020). The concept of “State Capacity Libertarianism,” which has recently been introduced by Tyler Cowen (Reference Cowen2020: online), emphasizes the need for a strong and capable state to “maintain and extend capitalism and markets” and “protect individual rights.” However, as Murphy and O’Reilly (Reference Murphy and O’Reilly2020: 737) argue, state capacity libertarianism contradicts certain strands of political economy literature. As they point out, state enforcement of property rights is either redundant in situations where private institutions and norms can cost-effectively safeguard private property rights (see Stringham Reference Stringham2015; Williamson Reference Williamson2011) or counterproductive when state institutions lack efficiency and their intervention hinders the smooth functioning of private institutions and norms (see Leeson Reference Leeson2014; Leeson and Harris Reference Leeson and Harris2018).

A younger generation of researchers “has noticeably less faith in government than their predecessors,” and they have investigated how the problems in Hobbesian anarchy can be solved by private or extralegal means of enforcement (Stringham Reference Stringham2005). These researchers find the conventional study of law and economics problematic, because it “takes the existence of a well-functioning institution of state law for granted” (Dixit Reference Dixit2004: 3) and treats the enforcers of the law “as robots who will automatically do what the law asks them to do” (Basu Reference Basu2018: 35). Despite many modern governments making great efforts to provide effective governance, none is able to guarantee that all social and economic activities are cost-effectively regulated (Skarbek Reference Skarbek2011). Extralegal governance institutions therefore “play an important role in protecting property and adjudicating disputes” in circumstances in which state-sponsored governance institutions are ineffective or absent (Skarbek Reference Skarbek2014: 6; see also Stringham Reference Stringham2015). Moreover, many governments, especially nondemocratic ones (e.g., Nazi Germany, Soviet Russia, Maoist China, and North Korea), are predatory and incompetent to provide governance (Murtazashvili and Murtazashvili Reference Murtazashvili and Murtazashvili2020); worse, they severely undermine social cooperation within their societies (Leeson Reference Leeson2014). Law and economics scholars should therefore not only examine the effect of legal rules on economic activities and outcomes but also devote equal attention to “lawlessness and economics” (Dixit Reference Dixit2004) and investigate how private individuals enhance cooperation, enforce property rights, and settle disputes without state law.

In the absence of effective government-provided legal institutions and organizations, individuals who want to obtain benefit from social cooperation are “considerably more creative in finding solutions to their problems than the academics who study them” (Leeson Reference Leeson2014: 3). Private individuals, organizations, and communities devise alternative mechanisms to improve cooperation and eliminate opportunistic behavior. Recent decades have witnessed a growing body of literature, from the disciplines of institutional economics, criminology, political science, sociology, and economic anthropology, examining the formation, prevalence, evolution, and function of extralegal governance institutions and suggesting that various extralegal governance institutions work better than conventional wisdom supposes. For example, Ostrom (Reference Ostrom1990) unmasks the ways in which local communities govern their common pool resources and overcome collective action problems. Bernstein (Reference Bernstein1992: 155) investigates “an elaborate, internal set of rules, complete with distinctive institutions and sanctions” developed by the diamond industry to resolve disputes among industry members, with the courts and legal rules playing no role. Leeson (Reference Leeson2009) adopts rational choice theory to examine how the world of late seventeenth- and early eighteenth-century pirates was regulated by a “pirate code” and constitutional democracy: Pirate customs served to compensate workers, regulate drinking and smoking, and increase racial tolerance and equality (see also Leeson Reference Leeson2007; Leeson and Skarbek Reference Leeson and Skarbek2010). Stringham (Reference Stringham2015) weaves together history and economics to show how private parties devise nonviolent mechanisms to solve the pervasive problem of fraud, facilitate exchange, and protect private property. Skarbek (Reference Skarbek2014) draws on institutional economics to examine why and how prison gangs form to produce alternative governance institutions facilitating illegal activities in the American penal system. These studies suggest that “private rules and regulations are more common, effective, and promising than most of us believe” (Stringham Reference Stringham2015: 4).

1.2 The Puzzle

Past research has thoroughly examined how and why extralegal governance institutions function more effectively than many believe in both democratic and dysfunctional states (Chamlee-Wright Reference Chamlee-Wright2010; Grossman Reference Grossman2021; Ostrom Reference Ostrom1990; Richman Reference Richman2017; Shortland and Varese Reference Shortland and Varese2016; Skarbek Reference Skarbek2014, Reference Skarbek2020a). For example, Grossman (Reference Grossman2020, Reference Grossman2021) examines the social order of informal markets in Lagos, Nigeria, and finds that market association leaders utilize informal institutions to promote trade, address group disputes, and gain the support of group members in order to avoid and respond to active government interference. Researchers have also studied how informal or extralegal governance institutions operate in authoritarian states. For example, Murtazashvili (Reference Murtazashvili2016) and Murtazashvili and Murtazashvili (Reference Murtazashvili and Murtazashvili2021) have comprehensively investigated the capacity of customary organizations at the village level in the governance of rural Afghanistan, which is widely viewed as a fragile state where people have endured a long history of conflict and political instability.

Moreover, recent decades have witnessed a growing body of literature on informal institutions in authoritarian China, where state capacity is strong. This literature includes the research of Yang (Reference Yang1994), Yan (Reference Yan1996), and Barbalet (Reference Barbalet2021) on the changing function of guanxi in Chinese society, Qiao’s (Reference Qiao2017) study of strategic interactions among market participants in China’s small property right housing market, and the research of Nee and Opper (Reference Nee and Opper2012) and Tsai (Reference Tsai2002) on the informal financing mechanisms developed by small business owners. However, the ways in which the Chinese state constrains or facilitates the formation and development of illegal markets, as well as how informal or extralegal governance institutions operate within these markets, remain underexplored.

To fill this gap, this book focuses on China’s illegal markets and explores different categories of governance institutions that facilitate cooperation within these markets. It explores several theoretically and empirically important questions: How does the state constrain or enable the growth of illegal markets? What are the major market-based uncertainties and political–legal risks faced by illegal market participants? How do governance institutions mitigate risk and secure social cooperation in illegal markets? More specifically, why do participants in a transaction face different types of risk, and why do they view the same risk differently? Why does one form of institutional mechanism work well for governing illegal transactions in one social setting while playing a marginal role in another setting? Why and how do market participants use different forms of governance institution to deal with the same category of risks? Illegal transactions are pervasive, and illegal markets continue to grow both online and offline. How does internet technology affect the social order of illegal markets? To answer these questions, researchers need to collect firsthand empirical evidence and develop innovative frameworks for analyzing illegal markets.

1.3 In Search of an Answer: How the Chinese State Facilitates the Growth of Illegal Markets

China is the perfect example of how in many circumstances authoritarian/centralized states are predatory, rather than protective, as stated by Hobbes in Leviathan. Often, the predatory state enables, rather than constrains, the emergence and development of illegal markets in many situations. The role of the authoritarian Chinese state in creating and promoting illegal markets is threefold.

First, China’s regionally decentralized authoritarian system, consisting of centralized fiscal and personnel control and decentralized economic governance (Xu Reference Xu2011), makes local government both developmental and predatory. Under decentralization, the central government has established “a growth-oriented performance evaluation system” (Wang et al. Reference Wang, Tan, Yang, Lin and Zhang2019: 3). This motivates local governments facing serious budget shortfalls to rely on the urban-biased land development policy to generate funds to “fulfil the mandates specified in the evaluation system,” such as attaining high growth rates and supplying massive infrastructure and public services (Cai et al. Reference Cai, Fan, Ye and Zhang2021: 2333). China can be considered a predatory state due to its lack of political constraints (i.e., “separation of powers at the national level”) and its partial protection of property rights; as a result, the Chinese government possesses strong abilities to arbitrarily expropriate property, such as land (Cai et al. Reference Cai, Murtazashvili and Murtazashvili2020: 154). In contemporary China, ownership of urban and rural land is defined as follows: “Urban land is controlled and owned by the state … whereas rural land is collectively owned” (Sa Reference Sa2020: 2). The separation of land-use rights and ownership empowers local governments to raise substantial extra revenue from land conveyancing: “The ratio of local governments’ financial expenditures to fiscal revenue from land soared from 5.7% in 1999 to 23.4% in 2015” (Zhu et al. Reference Zhu, Wei, Lai, Li, Zhong and Dai2019: 742). Local governments convey urban land and collectively owned rural land to real estate developers for enormous profits, while residents who possess land-use rights are largely excluded from the decision-making process by local governments and village leaders and are usually undercompensated for what they lose (Cai Reference Cai2003). Given that land property rights are ambiguously defined and that there is a lack of transparency and grassroots input, villagers need to develop strategies to safeguard their interests. Due to domestic migrants’ high demand for affordable housing, informal housing markets and their associated exchange institutions have emerged from the bottom of the hierarchy (Qiao Reference Qiao2017; Wu et al. Reference Wu, Zhang and Webster2013). The small property right housing market is a typical example and will be examined in this book.

Under such an urban-biased political regime, local governments not only need to promote local economies but also have to control rural–urban migration (Shifa and Xiao Reference Shifa and Xiao2022). Urban-biased development policies, which systematically discriminate “against agriculture and the rural economy in the allocation of developmental resources” (Bezemer and Headey Reference Bezemer and Headey2008: 1342), have given rise to a significant urban–rural gap. The enormous disparity in income and living standards between rural and urban residents encourages rural residents to seek job opportunities and better livelihoods in urban areas. To maintain urban fiscal sustainability (Shifa and Xiao Reference Shifa and Xiao2022), the Chinese government uses its household registration system (hukou) to deprive rural-to-urban migrants of equal access to employment, education, health care, and social and political advancement in urban areas. China’s uneven development and the discriminatory hukou system have led to many migrants from rural areas working as unlicensed street vendors in urban centers (Huang et al. Reference Huang, Zhang and Xue2018). As the government does not recognize and protect these workers’ property rights, such as user rights to public space, street vendors have developed extralegal governance institutions in order to survive.

Second, the authoritarian state has wide powers, but it lacks checks and balances to guard against abuses of power by those who wield it. The lack of political constraint and bottom-up monitoring has led to the rise of a gigantic market for power–money exchanges. Since the 1990s, corruption in China has become rampant and systematic. As Wedeman (Reference Wedeman2012: 2) points out, “in the case of China, we see rising corruption, high growth rates, and high-speed economic development.” The intensification of corruption is linked to the “commodification” of state-owned resources and the transfer of “assets from the command sector to the market” (p. 9). As a result, the primary form of corruption became transactive corruption between public officials and private actors, rather than predatory plunder such as embezzlement of state funds and property. The study of transactive corruption should focus not only on illegal exchanges between officials and citizens, however. Recent studies have started to pay attention to transactive corruption within the public sector. For example, Wang and Yan (Reference Wang and Yan2020: 612) observe that corruption in the form of gift-giving and extravagant position-related consumption increases “the efficiency of bureaucrats trying to develop local economies in China, where the political structure is fragmented and the formal incentive system is incomplete.” Zhu (Reference Zhu2008) and Wang (Reference Wang2016) investigate the buying and selling of public appointments, which is a popular form of transactive corruption in the public sector (see also Hillman Reference Hillman2010; Wang and Wang Reference Wang and Wang2018). These scholars argue that the weaknesses of the formal, rule-based personnel system, such as overconcentration of power in the hands of senior officials and the failure of the state to monitor these officials’ misuse of office, allow many public officials to use social ties and bribery to gain promotion. The prevalence of transactive corruption in China offers an ideal opportunity for researchers to make a closer examination of how extralegal governance institutions facilitate corrupt transactions.

Third, the authoritarian state achieves legitimacy by launching campaigns and solving easily identified and easily handled societal problems (Alon et al. Reference Alon, Farrell and Li2020; Wang Reference Wang2020b; Yang and Zhao Reference Yang and Zhao2015; Zhu Reference Zhu2011), while illegal markets that are hidden and nonviolent are largely tolerated by the local government. The central government of China is strong in respect of the fiscal resources it controls, but local governments responsible for implementing policies – including anticrime policies – are often weak due to lack of funds (Ong Reference Ong2018; Wang and Wang Reference Wang and Wang2024). Faced with the rise of illegal markets, such as gambling and prostitution, local law enforcement agencies punish only those who commit violent offenses, preferring to generate extra-budgetary revenue by collecting fines from illegal market participants such as sex workers and gamblers. In other words, because local law enforcement agencies lack the motivation and capability to eradicate or regulate illegal markets, they turn a blind eye to illegal markets that are relatively nonviolent. As communication and information technology developed, illegal entrepreneurs started to use innovative internet-based strategies to market services, such as private loans and gambling, and enforce agreements. As physical violence is not a characteristic of online illegal markets, and online interactions between exchange partners are anonymous, participants in these markets are able to escape police attention and avoid punishment.

These key features of the Chinese authoritarian state – an urban bias, broadly defined powers without checks and balances, and legitimacy maintained by solving easily identified problems – are highly relevant to the growth of illegal markets. The emergence, development, and social order of illegal markets in authoritarian China are different from these in democratic counties. For example, China has witnessed the formation of large-scale markets in informal housing, the buying and selling of government appointments, and unlicensed street vending, whereas these markets are small, or simply do not exist, in democratic countries. The research into China’s illegal markets contained in this book therefore enriches the literature on illegal markets and non-state institutions by offering a clear picture of extralegal governance and illegal markets in an authoritarian state. It generates new knowledge concerning the role of the state in enabling or constraining illegal markets, the range of risks, and the complexity of extralegal governance institutions in illegal markets.

1.4 Objectives and Contributions of This Book

This book aims to provide a socio-economic approach for studying the social order of illegal markets as well as risks and institutions within these markets. It seeks to advance understanding of extralegal governance in authoritarian China, where the economy is experiencing transition (Coase and Wang Reference Coase and Wang2016), private property rights are ambiguously defined (Bai et al. Reference Bai, Lu and Tao2006; Zhu Reference Zhu2008), the judicial system is not strong (Gong Reference Gong2004; Li Reference Li2012; Wang Reference Wang2013b), public-sector corruption is an ongoing concern (Lu Reference Lu2000; Wang Reference Wang2016; Wedeman Reference Wedeman2012), and illegal markets are thriving (Shen et al. Reference Shen, Antonopoulos and Von Lampe2010; Wang and Antonopoulos Reference Wang and Antonopoulos2016; Wong Reference Wong2016). Specifically, we examine, both theoretically and empirically, the characteristics of illegal markets, especially their social legitimacy, and the nature of exchange relationships, particularly regarding whether participants are embedded in power-imbalanced relations and face different risks of punishment. We also explore the existence of various types of risks and the ways in which private individuals, companies, and organizations utilize them to mitigate risk and facilitate social cooperation and economic exchange in illegal economies. We adopt a multiple case study design comprising four cases: unlicensed street vending, small property right housing, corrupt exchanges, and online loan sharks. The cases are specifically selected to sample China’s illegal markets, which range from offline to online, from public sector to private sector, and from socially acceptable to socially unacceptable (Small Reference Small2009).

The first two cases are illegal but socially legitimate, whereas the latter two are neither legal nor socially legitimate. The boom of street vending and the small property right housing market are defining features of China’s rapid urbanization and uneven development (Huang et al. Reference Huang, Zhang and Xue2018; Qiao Reference Qiao2017). Rampant corruption in the public sector and the rise of online illegal markets also characterize contemporary China (Gong Reference Gong2002; Huang Reference Huang, Zhang and Xue2018; Wedeman Reference Wedeman2012). Due to the fact that different markets include different economic activities, and participants in these markets face different market and political risks and challenges, illegal economy participants need to develop a range of extralegal governance institutions in order to secure cooperation, prevent opportunistic behavior, and counter the threat of government repression. A certain type of extralegal governance institution might work cost-effectively in regulating one category of market transaction, but its role in safeguarding another type of transaction may be marginal. Moreover, participants in street vending and the small property right housing market are willing to coordinate collective resistance to government interference, while corrupt transaction partners and online loan sharks must develop effective institutions to hide their illegal activities and avoid government crackdowns.

The empirical investigation of these four cases enables us to offer insights on a number of essential but understudied issues, including the impact of key features of the authoritarian regime on the development of illegal markets, major market and political–legal risks in illegal markets, and the key forms of extralegal governance institutions developed by market participants in different social settings. The examination of extralegal governance and illegal markets under authoritarianism contributes to the broader study of institutions and illegal markets: It offers a foundation for comparative studies of the governance of illegal markets in democratic and nondemocratic countries. In addition, it offers valuable evidence to government agencies, offering insights into non-state governance institutions and improving agencies’ ability to provide the governance needed.

This book contributes to the existing literature in three ways. Firstly, and more generally, it is one of the first English-language books focusing on private rules and regulations in illegal markets and presenting a comprehensive picture of illegal markets and extralegal governance institutions in China. Past research has focused on self-governance or extralegal governance in democratic and dysfunctional states (Chamlee-Wright Reference Chamlee-Wright2010; Leeson Reference Leeson2014; Murtazashvili Reference Murtazashvili2016; Ostrom Reference Ostrom1990; Richman Reference Richman2017; Shortland and Varese Reference Shortland and Varese2016; Skarbek Reference Skarbek2014, Reference Skarbek2020a), whereas studies of extralegal governance institutions in China are rare, except for Qiao’s (Reference Qiao2017) research on China’s small property right housing, Ho’s (Reference Ho2017) research on the function and credibility of institutions in the real estate land, housing, and natural resources sector, and the research of Nee and Opper (Reference Nee and Opper2012) as well as Tsai (Reference Tsai2002) on the informal financing mechanisms developed by small business owners. We argue that extralegal governance institutions may play a larger role in China than in democratic regimes. This is because the Chinese government is more predatory than democratic governments, and it frequently takes advantage of ambiguously defined property rights to rob its citizens; for example, private land ownership does not exist in China, and local governments, rather than local residents, are always the primary beneficiaries of conveying land-use rights to real estate developers (Hsing Reference Hsing2010; Lin Reference Lin2009). As a result, informal community-based institutions for protecting private property are common in China.

The prevalence of informal institutions is also due to the importance and resilience of guanxi (i.e., social ties) in both the public and the private domains (Barbalet Reference Barbalet2018; Bian Reference Bian2019; Chan and Yao Reference Chan and Yao2018; Li Reference Li2011; Qi Reference Qi2013; Ruan Reference Ruan2019; Wang Reference Wang2017; Yan Reference Yan1996; Yang Reference Yang1994; Zhan Reference Zhan2012). To be specific, social cooperation among Chinese people is to a large extent determined by economic calculation and social mechanisms, with formal institutions playing a comparatively small role. The discussions above suggest that informal institutions in China, specifically extralegal governance institutions, constitute an essential research topic deserving more scholarly attention. This book’s examination of the ways in which extralegal governance institutions work in China’s illegal markets therefore adds value to the general literature on institutions.

Secondly, and theoretically, this book draws insights from sociology and institutional economics to establish a socio-economic approach to explain risks and extralegal governance institutions in illegal markets. The socio-economic approach considers two dimensions: macro and micro. Macro dimensions, including social legitimacy (distinguishing between legitimate and illegitimate illegal markets) and levels of state repression, are used to examine the nature of illegal markets, the different risks experienced by participants in different markets, and the varied forms of institutions employed by market participants. Macro dimensions also take into account the social order of illegal markets when operating online. On the other hand, micro dimensions, including power-dependence relationships and levels of criminal punishment, are helpful for investigating the characteristics of exchange relationships and identifying the different kinds of risk experienced by exchange partners (buyers and sellers) in the same market. The construction of this analytical approach is largely based on existing studies that use economics – especially new institutional economics – and sociology to analyze risks, private institutions, and institutional change (Beckert and Dewey Reference Beckert, Dewey, Beckert and Dewey2017; Greif Reference Greif2006; Leeson Reference Leeson2009, Reference Leeson2014; Liu and Weingast Reference Liu and Weingast2017; Skarbek Reference Skarbek2014; Stringham Reference Stringham2015). This book therefore not only contributes to the study of illegal markets in China but also facilitates the exploration of illegal markets in general.

Thirdly, and empirically, this book contributes to the understanding of extralegal governance by utilizing rich and valuable empirical data collected by the two authors and their research collaborators. Non-state institutions and illegal markets in authoritarian China have been largely ignored in the existing literature for two main reasons. First, language barriers not only discourage Western scholars from conducting fieldwork and obtaining local understanding of how extralegal governance institutions work in China, but also prevent Chinese scholars from obtaining insights from Western literature and publishing their research findings in international journals. Second, the Chinese government has broadened the scope of academic censorship, meaning researchers have had to restrict their attention to politically correct and otherwise acceptable topics, leaving many essential areas, including self-governance in semilegal and illegal markets, unexplored or understudied.

It is not easy for researchers who study China-related topics to gain access to interviewees and obtain reliable interview data. Researchers who collect empirical data on politically sensitive topics in China, such as corruption, organized crime, and collective resistance, face greater risks than those who study the same topics in democratic countries. Academic research based on survey data collected from over 500 China scholars reveals the repression they experienced: “Roughly 9 per cent of China scholars report that they have been ‘invited to tea’ by authorities within the past ten years; 26 per cent of scholars who conduct archival research report being denied access; and 5 per cent of researchers report some difficulty obtaining a visa” (Greitens and Truex Reference Greitens and Truex2020: 349). Our social connections with interviewees allowed us to collect rich and valuable interview data, which enables us to understand how private individuals in illegal markets avoid external threats from control agencies, such as the police and anti-corruption agencies, and handle internal conflicts caused by dishonest exchange participants.

1.5 Outline of This Book

This chapter emphasizes the lack of good-quality research focusing on how extralegal governance institutions operate in illegal markets in authoritarian China, discusses the rationale for studying the social order of illegal markets in China, and illustrates the contributions this book makes to the literature. Chapter 2 defines “governance” and “extralegal governance institutions,” discusses mechanisms of extralegal governance, and provides a definition of illegal markets. It then summarizes the essential contributions made by new institutional economists and economic sociologists, who have developed different approaches to analyzing social and economic order. Over the past few decades, researchers from the two camps have frequently gained insights from each other, but there is still a lack of cross-disciplinary research collaboration. Synthesizing key concepts and theories from both sociology and economics, the chapter develops a socio-economic approach to analyzing illegal markets, as well as the risks and institutions within these markets. The socio-economic approach investigates both the characteristics of illegal markets and the nature of exchange relationships between participants. It reveals that participants in different illegal markets may experience heterogeneous types of risks and uncertainties. Even participants in the same market may face different concerns and uncertainties, or they might perceive the same type of risk differently. This requires market participants to develop innovative approaches in developing extralegal governance institutions to secure transactions and mitigate risks in diverse markets. The socio-economic approach offers valuable insights for the study of China’s illegal markets.

Chapter 3 outlines the methodology and explains how the empirical data was collected. It offers detailed discussions about the multiple case study design and the rationale for selecting the four cases, which are street vending, small property right housing, corrupt exchanges, and online loan sharks. The multiple case study design enabled us to make use of interviews, observation, and published materials to obtain an accurate and complete understanding of risks and extralegal governance institutions in different social settings. This chapter covers how informants were selected, the challenges we experienced and how we handled them, and the limitations of our empirical data.

Chapters 4–7 focus on different types of illegal markets. Chapter 4 examines how street vendors protect property rights and address uncertainties without state support. In the absence of state recognition of property rights and state protection, street vendors have to deal with both market-based uncertainties (e.g., resource limitations, competitive bidding, competition for the best vending locations) and uncertainties caused by ambiguous or hostile state regulation. Our findings show that street vendors in our research sites form mutual aid groups based on hometown and ethnicity. Shared norms, values, and routines have been formed among street vendors to facilitate within-group cooperation, which not only helps them solve the problems of resource limitation, competitive bidding, and marketing, and uncertain allocation of public space but also facilitates their collective resistance to government repression. We also observed that street vendors who cannot form or join strong mutual aid groups usually fail to resist government interference and thus face a higher risk of having their properties confiscated by city administrative officials. In our research sites, some street vendors could purchase extralegal protection from the city urban administrative and law enforcement bureau (Chengguan) and its officials, who, for department-level and personal benefits, defy higher-level policies and protect street vendors from harassment, eviction, and confiscation imposed by themselves and other city administrative officials.

Chapter 5 investigates the extralegal governance institutions deployed in the small property right housing market. Small property right housing (xiao chan quan fang) is housing built on collectively owned land without legal title. Villagers are generally entitled to exchange their own housing plots with others in the village, but exchanging them with outsiders is prohibited and not protected by state law. Small property right housing is illegal, but large-scale residential communities built on collectively owned land have accommodated many immigrants and are often tolerated by local governments, which will intervene or engage in demolition only when they believe the continued existence of this market will give rise to disputes, threaten social order, destroy the local economy, or reduce government revenue (He et al. Reference He, Wang, Webster and Chau2019; Qiao Reference Qiao2015; Zhang and Zhao Reference Zhang and Zhao2018). Due to the complexity of the small property right housing market (i.e., it is illegal, but socially legitimate and selectively tolerated by local governments), it can be categorized as a special type of illegal market. Participants in small property right housing markets have to develop private institutions to support exchange and avoid government interference.

Our empirical data offers insights into how builders and buyers of small property right housing develop a series of mechanisms to mitigate the risks of contract fraud and government interference. We found that written documents – such as informal certificates of title, contracts of exchange, or lawyers’ testimonies – and contract-signing rituals are used to define private property ownership, communicate shared knowledge of the extralegal market outside state law, and help sellers assess buyers’ trustworthiness. Sellers also make use of online WeChat groups to facilitate information sharing that sustains the reputation mechanism. More importantly, we found that village committees, functioning as representatives responsible for villagers’ self-governance as well as quasi-formal branches of local government, are often capable of enforcing informal property rights. Village committees in many villages perform multiple roles such as builders and sellers of small property right housing and property rights enforcers, whereas village committees in other villages only function as third-party enforcers. In their role as enforcers of property rights and guardians of informal transactions, village committees establish databases as a public good. These databases contain information relating to the registration of ownership and transactions. Village committees also organize collective action (e.g., provision of public goods and collective resistance) and seek political patronage to deter government interference.

Chapter 6 studies the informal institutions used to facilitate corrupt transactions, which are associated with high transaction costs and exchange risks because they are prohibited by state law. Such transactions necessarily lack transparency in order to evade anti-corruption agencies (Lambsdorff Reference Lambsdorff2002). To initiate a corrupt transaction, exchange partners have to employ a private/secret channel to collect enough information to assess one another’s reputation for trustworthiness in the social network, which consists primarily of bribe-takers and -givers. In most cases, bribe-givers have to make payment first and trust that the bribe-takers will deliver the promised benefits (Della Porta and Vannucci Reference Della Porta and Vannucci2012; Wang Reference Wang2020a). The asynchronous nature of such exchanges increases uncertainty for exchange partners. The chapter investigates a typical form of corrupt transaction in the public sector: the buying and selling of government appointments. It examines the embeddedness of these transactions in strong-tie relations and the ways in which informal institutions minimize transaction risks under conditions of illegality through the use of “hostages” and mianzi. “Hostages” in corrupt transactions include ganqing (deep emotional attachment developed through long-term interactions, exchanges, and mutual help) and human capital investment (e.g., time and money) in maintaining exchange relations. Mianzi can be simply translated as face, which refers to reputation and social esteem in the social network. The chapter goes on to discuss other essential governance institutions that strongly bind exchange partners and prevent opportunistic behavior but have been ignored by the literature, including disclosing compromising information to anti-corruption agencies and employing corrupt intermediaries.

Chapter 7 examines the governance mechanism of illegal transactions in the illegal online lending market. The popularity of online peer-to-peer lending platforms has brought loan sharks who previously only operated offline into contact with online targets on the internet, where they encounter a new series of challenges. An example of this is the reputation mechanism, which preforms an informational and sanctioning function in offline businesses but plays little part in attracting and screening clients online. Lusthaus (Reference Lusthaus2018a: 193) argues that the anonymity of the internet poses significant difficulties for criminals seeking to “assess trustworthiness and enforce agreements” in the absence of physical interactions. Conventional enforcement strategies, such as violence and unexpected office or home visits, are no longer cost-effective given the lack of geographical proximity of lenders and clients. Loan sharks have thus had to develop new mechanisms to handle defaults. The chapter empirically examines loan sharks’ debt-trapping strategies and extralegal governance institutions (e.g., use of social contacts and nude photos as compromising information) to attract clients, regulate exchange behavior, lower the default risk, and enforce repayment.

Chapter 8 presents reflections and conclusions. The multiple case study approach adopted by this research not only “provide[s] a broader array of evidence than do single cases” (Yin Reference Yin2012: 131) but also enabled investigators to analyze and synthesize similarities, differences, and patterns across four cases to show different categories of risks and institutions and how extralegal governance institutions operate in different illegal markets. It enriches the understanding of institutions and illegal markets by utilizing firsthand data and developing an analytical framework to examine the operation, persistence, and complexity of extralegal governance institutions in China’s illegal markets. The analytical framework may attract wider academic interest in illegal markets and enhance researchers’ analytical capability. The chapter also discusses the potential of this research to deliver valuable changes to public policy. This research enriches the government’s understanding of the complexity and function of extralegal governance institutions and encourages policymakers and legislators to acquire knowledge and skills developed in local communities.