Contract Enforcement Efficiency and firms’ Competitive Advantage

The effectiveness of contract enforcement, an essential component of the institutional environment, may significantly impact the business choices made by an enterprise. Based on the Cobb-Douglas production function and the theory of incomplete contracts, this study optimized the Cobb-Douglas production model to analyze the influence of contract enforcement efficiency on an enterprise’s ability to set product prices, its profitability, and its ultimate competitive advantage in the market. This study empirically examined the theoretical hypotheses using a sample of A-share listed manufacturing companies from 2003 to 2021. The findings indicate that a rise in contract enforcement efficiency enhances an organization’s competitive advantage in the market. Various robustness tests validate this conclusion. The mediation mechanism analysis indicates that this influence is mainly attributed to the reduction of the enterprise’s financing costs and the results of heterogeneity test reveals that the effect of contract enforcement efficiency on competitive advantage is affected by factors such as the nature of the enterprise’s property rights, the degree of pollution of the enterprise, and the enterprise’s factor intensity. The policy significance lies in the need to attach importance to the role of contract enforcement efficiency in enhancing the competitive advantage of enterprises, as well as the coordinated development of the contract enforcement environment in different regions.