Dialect diversity and market integration: From the perspective of city circle*

Abstract

China, as a transitional economy, faces a high level of market segmentation among administrative regions, which lowers the efficiency of resource allocation and the total factor productivity (TFP) rate. The literature has focused on the negative effects of local protectionism and administrative division on the formation of market integration in the economic growth process. However, considering that administrative districts such as prefectures usually overlap with cultural regions in China, the effects of local protectionism and administrative division on market segmentation may be overestimated because cultural diversity may also be negatively related to market integration. More importantly, diversity of dialect tends to increase the cost of communication, making it a barrier to labor migration and decreasing the level of generalized trustamong people. As a result, it may have adverse effects on the market integration process.