The economic transactions in rural China are self-enforceable without any legal enforcement because they are embedded in the informal social institutions based on gift giving guanxi ties. These ties are of two types—expressive guanxi ties based on reciprocal gift exchange and instrumental guanxi ties based on unidirectional gift giving. In this paper, we first prove theoretically that gift giving is a result of rational conduct that minimizes expenditure. Thereafter, a few hypotheses are proposed and empirically tested through categorical regression and analysis of micro level data. We find that expressive guanxi ties are not related to income level but instrumental guanxi ties are related to income level. In other word, we verify the rationality of informal institutions in rural China. It is implied that under a situation whrein the cost of transition from informal to formal social institutions for economic transaction is prohibitive, the present informal human governance based on gift giving will continue to be employed by Chinese villagers, because it is an intrinsically rational system.


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