Munich Personal RePEc Archive

Confucianism and the Legalism: A
Model of the National Strategy ofGovernance in Ancient China
Zhou, Haiwen

13 October 2017

Online at https://mpra.ub.uni-muenchen.de/81944/
MPRA Paper No. 81944, posted 16 Oct 2017 20:30 UTC

Confucianism and the Legalism: A Model of the
National Strategy of Governance in Ancient China
Haiwen Zhou

Abstract
The Confucianism school emphasizes family value, moral persuasions, and personal
relations. Under Confucianism, there is a free-rider issue in the provision of efforts. Since national
officials are chosen through personal relations, they may not be the most capable. The Legalism
school emphasizes the usage of incentives and formal institutions. Under the Legalism, the ruler
provides strong incentives to local officials which may lead to side effects because some activities
are noncontractible. The cold-blood image of the Legalism may alien citizens. By exploiting thepaternalistic relationship between the ruler and the ruled under Confucianism and the strength of
institution-building under the Legalism, the ruler may benefit from a combination of Confucianism
approach and the Legalism approach as the national strategy of governance. As each strategy has
its pros and cons, which strategy of is optimal depends on factors such as the minimum enforceablelevel of public service and the level of institution building costs.
Keywords: Confucianism, Legalism, national strategy of governance, ancient China, incentive
provision, culture
JEL Classification Numbers: N45, H10, A10
1. Introduction
A national strategy of governance was useful to unify thoughts, to guide expectations, andthus to consolidate resources to achieve national goals. Rulers in ancient China might choose fromdifferent national strategies of governance. First, the Confucianism approach could be used as thenational strategy of governance. Second, the Legalism approach could be used as the national
strategy of governance. Third, different combinations of Confucianism approach and the Legalism
approach could be used as the national strategy of governance. 1 There are some interestingquestions about the national strategies of governance in ancient China. First, Confucianism wasbelieved by many to be too idealistic. It was also frequently criticized as an obstacle for the
adoption of new and valuable ideas. If so, why did rulers in ancient China promote Confucianism
as a national philosophy? Second, while the institutions from the Legalism school helped Qin Shi
Huang to unite China in 221 BC, why did many rulers avoid promoting the Legalism publically as
Other strategies of governance were also practiced in ancient China. For example, at the beginning of the Han
Dynasty (206 BC – 220), the Daoist was followed as a national strategy of governance. The Daoist school promoted
a life style of a hermit (Waley, 1982). Under the influence of the Daoist school, the Han government had a laissez faire attitude toward the daily lives of citizens.
11

a national strategy of governance? Finally, what were the key factors affecting a ruler’s choice ofnational strategy of governance?
There are voluminous studies on ancient China. For example, Huang (1982, 1997, 1999)
and Wong (1997) provide illustrations of China’s general history. Elvin (1973), Chao (1986),
Huang (1974), Shiue (2004, 2005), and Shiue and Keller (2007) specialize on economic history.
Lin (1995), Wong (1997), and Pomeranz (2000) focus on the divergence between China andEurope in terms of achieving industrial revolution independently. More specific to this paper, Gu(2010) and Waley (1982) provide illustrations of different schools of thoughts in China. However,to our best knowledge, there is no formal model addressing the national strategy of governance inancient China. A formal model will be useful to organize our thinking on this important issue.
This paper contributes to the literature by interpreting the key features of Confucianism and theLegalism from the perspective of economics and analyzing the advantages and disadvantages ofusing Confucianism and the Legalism as a national strategy of governance in ancient China in aformal model. In this model, there are multiple districts. In each district, output is determined by
the labor input and public service of local officials and the average ability of national officials. A
higher amount of institution building will lead to higher average ability of national officials withthe corresponding higher cost. The ruler chooses the national strategy of governance which
determines the levels of labor input and public service of local officials and the average ability ofnational officials, and thus the level of output in each district. Suppose beyond a minimum levelof public service, the ruler could not write a contract on the level of public service provided by alocal official.
First, we study the first-best case as a benchmark. In the first-best case, inputs of a local
official and the degree of institution building are optimally chosen. We show that there iscomplementarity in the choices of labor input and public service of local officials and the choiceof the intensity of institution building. The ruler provides less incentive to local officials when theinstitution building cost increases. A decrease of the cost of effort of a local official leads to higher
levels of public service and labor input. In the first-best case, the levels of public service, labor
input, and the intensity of institution building increase with the number of administrative regionsin the country.
Second, we study the usage of Confucianism as a national strategy of governance. Under
the Confucianism approach, the country was like an extended family and moral persuasions rather
2than incentives were emphasized. Also, Confucianism valued personal relations. We show there
are pros and cons of the Confucianism approach. On the one hand, because relying on formal
incentives could lead to negative side effects, there are roles to be played by culture and social
norms. More specifically, Confucianism can be used as an informal contract to soften the freerider problem when no formal incentive was provided. On the other hand, under Confucianism,
since local officials share local output, there is a free rider issue. Also, since national officials arechosen through personal relations, national official may not be the highest quality.
Third, we study the usage of the Legalism as a national strategy of governance. Under the
Legalism approach, the ruler provided strong incentives to citizens and emphasized the usage ofinstitutions in achieving desired results. Also, the government had a strong control of the daily
lives of citizens. There are pros and cons associated with the Legalism approach. On the one
hand, the free-rider issue in the provision of efforts is solved. If the number of districts in the
country is high, it pays to build formal even though costly institutions to select national officials.
On the other hand, providing strong incentives to local officials could lead to undesirable side
effects (Lazear, 1989, Holmstrom and Milgrom, 1991). Since the level of public service isnoncontractible, under the Legalism, the provision of public service by a local official could be
too low. Also, the cold-blood image of the Legalism may alien citizens.
The Legalism school argued that reward and punishments should be significant and citizens
should be kept poor to make the policies more effective. In addition, individuals were restrictedin their career choices and residential choices. We show that those strategies adopted by the
Legalism school are consistent with economic theory.

As those measures decreased thereservation utility of a citizen, they decreased the cost of providing incentives to citizens andincreased the payoff of the ruler. Showing the working of the Legalism as a system is anothercontribution of this paper to the literature.
Finally, we discuss which strategy should be adopted as the national strategy ofgovernance. Which approach would work better than others depends on various factors. First,
when the cost of institution building is lower, or if the spread of the distribution of talents in society
is higher, the ruler is more likely to use institutions in the selection of national officials. Second,
when the minimum enforceable level of public service increases, the ruler will provide more
incentives to local officials. Third, an increase of the number of administrative regions would
increase the adoption of formal institutions in the selection of national officials.
3This paper is related to two lines of literature. First, this paper is related to the literature
showing that negative externalities might be generated if the principal provides strong incentives
to agents. In Lazear (1989), a large reward to the winner of a contest will increase a contestant’s
allocation of resources to sabotages rather than to productive activities. In Holmstrom andMilgrom (1991), a principal benefits from an agent’s effort in multiple activities. If the principal
does not provide incentive to the agent, the agent will allocate effort on multiple activities.
Rewarding one activity with a low variance of measurement can lead to the decrease of effort onother activities with higher variances of measurement. As a result, the payoff to the principal when
incentive is provided to the agent could be lower than that when no incentive is provided to theagent.

Second, this paper is related to the literature on culture and social norms.

While

Confucianism was promoted by rulers intentionally as a national philosophy, social norms could
be formed spontaneously. However, once the ideas of Confucianism had become ingrained into
the value systems of citizens, they became a part of the social norms. The focus in this paper isdifferent from the focus of models on social norms. Models on social norms study the impact ofsocial norms on social welfare. On the one hand, Fang (2001) shows that social culture can beused to overcome informational free-riding problem. On the other hand, Elster (1989) argues thatsocial norm may not always increase social welfare and various practices that could increase social
welfare have not been incorporated into social norms. This model does not focus on how
Confucianism or the Legalism may overcome market failure. It recognizes the pros and cons ofConfucianism and the Legalism and focuses on the conditions under which one strategy would
work better than others.
The rest of the paper is organized as follows.

Section 2 illustrates the historicaldevelopment of national strategies of governance in ancient China to motivate the model. Section
3 specifies the model. Section 4 addresses the first-best national strategy of governance. Section
5 studies the usage of Confucianism, the Legalism, and different combinations of the
Confucianism and the Legalism as a national strategy of governance and compares theperformance of different strategies of governance. Section 6 concludes.
2. Historical Development of National strategies of Governance in Ancient China
In this section, we illustrate the historical development of different national strategies ofgovernance in ancient China. One thing we should keep in mind is that the development of each4

school of thought is a dynamic process. Historically, each school of thought benefited from andborrowed ideas from other schools of thought.
“One hundred schools of thoughts” including Confucianism and the Legalism appeared
during the Spring-Autumn Period (770 BC-476 BC) and the Warring States Period (475 BC-221
BC).

During this period, because vassals engaged in wars of annexation, the number ofautonomous political powers decreased over time. First, at the beginning of the Spring-Autumn
Period, there were more than four hundred autonomous political powers. Second, at the beginningof the Warring States Period, there were only seven major states. Finally, at the end of the Warring
States Period, the State of Qin united China in 221 BC. This period of fierce competition among
rulers created a relatively tolerant environment for different schools of thoughts to prosper.
Scholars from different schools tried to promote their policies to rulers dreaming of strategies that
could lead to their military dominance over their peers.
2.1. Confucianism
The origin of the Confucianism went back to the Duke of Zhou (? – 1043 BC) of the Zhou
Dynasty (1046 BC-256 BC). It is claimed that the Duke of Zhou developed “li” (ritual) to regulate
the relationship between the Zhou ruling house and vassals and other nobles (Huang, 1997). The
Zhou Dynasty could be viewed as practicing of Confucianism. At that time, communities had
small sizes of population. Under Confucianism, society was organized by a hierarchy of relations.
Loyalty and filial piety were viewed as important virtues.
Famous scholars of the Confucianism include Confucius (551 BC-479 BC) and Mencius(372 BC-289 BC). Confucius had a very successful record in educating students as it was claimed
that he had more than three thousand students of which seventy-two were prominent. Viewing theperiod of the Duke of Zhou as the golden time, Confucius thought it would be good to go back to
the political system in the early period of the Zhou Dynasty. Even though Confucius was elevatedto high status after his death, his political career was not very successful. He spent many years inpromoting his ideas to rulers in different states and was not well received. Mencius also tried topromote his ideas to rulers. With his fame, he got some interviews such as with the King Hui of
Liang (Wei). As Mencius tried to promote “yi” (righteousness) and the rulers were interested inquick and practical solutions to the questions they faced, Mencius lost his audience and was notvery successful in his political career.
5There are some important features of Confucianism. First, the objective of Confucianism
was to establish a harmonic society, rather than to promote the interests of the ruler. For example,
Mencius thought that citizens were more important than the government, and the government wasmore important than the ruler.
Second, the Confucianism school did not encourage the usage of material incentives andopposed the usage of severe punishments to rule. To motivate individual behavior, moral
obligations were emphasized. For Confucianism, a country is an extended family and a ruler
should take care of his citizens like a father would take care of his children. Both the ruler and his
subjects and a father and his children have their rights and obligations. The ruler should behave
like a ruler and a minster should behave like a minister, and a father should behave like a father
and a son should behave like a son (jun jun, chen chen, fu fu, zi zi).
Third, the Confucianism school did not value institutions in inducing desirable behavior.
This school thought that human nature was good. Good behavior resulted from good human natureand institutions would not be necessary to induce good behavior. To rule effectively, the ruler
should find people with high moral standards and place them at important positions.
Recommendations by local communities or highly respected persons would be a valuable strategy
to select government officials. Moral teaching was used to convince government officials that
corruption should not be practiced. The ruler should trust government officials.
Fourth, in terms of foreign relations, Confucianism discouraged a state’s invasion of otherstates. Confucianism argued that by following the guidance of li, a humane ruler would induce
residents in other states to accept the rule of the humane ruler voluntarily. Relying on militaryforce as a defense would be inferior and would be unnecessary for a state.
Overall, Confucianism emphasized family value and moral persuasions. Also, personal
relations rather than institutions were emphasized. The Confucianism approach had a merit ofencouraging the rulers to take the welfare of citizens into consideration in their ruling. However,
the Confucianism approach could be too idealistic and could not fit reality. In reality, the selectionof government officials through recommendations valued by Confucianism led to high level ofcorruption. High positions of the government were monopolized by individuals with strong family
backgrounds and capable individuals with weak family backgrounds could not get high rank
positions (Qian, 2001).

6

2.2 The Legalism
The Legalism school argued that law should be applied equally among all individuals,
regardless of the position of an individual. This school did not depict a romantic picture of thepast and had a pragmatic attitude in designing policies to handle governmental affairs. During theSpring-Autumn period and the Warring States period, the Legalism school was adopted by Guan
Zhong (about 723 BC or 716 BC – 645 BC) of the State of Qi, by Shen Buhai (about 385 BC –337 BC) of the State of Han, and by Li Kui (455 BC – 395 BC) of the State of Wei. Moresignificantly, the Qin Dynasty (221 BC – 206 BC) adopted the Legalism as the national strategy
of governance.2
Guan Zhong, who introduced various types of social and economic policies in the State of
Qi and helped the State of Qi to become a superpower at that time, was usually credited as a pioneerof the Legalism school (Lu, 2011). Shang Yang (about 395 BC – 338 BC) and Li Si (about 284
BC – 208 BC, the prime minister of Qin Shi Huang (259 BC – 210 BC)) were also some of thefamous followers of the Legalism. Ideas of the Legalism were synthesized by Han Fei (about 281
BC - 233 BC) who was a member of the royal family of the State of Han. Han Fei integrated thethree tools of ruling proposed by other thinkers of this school: law (fa), political tactics (shu), andauthority (shi). First, law would be used to rule average citizens. Second, political tactics would
be used to control powerful ministers. Third, a ruler’s authority depended on his position,
legitimacy, and the high pressure produced under harsh law. Han Fei was mainly a scholar, andhis political career was not very successful and he died in the jail of the State of Qin. 3
There are some important features of the Legalism. First, the sole purpose of the Legalism
was to make the rule of the ruler longer.4 For the Legalism, each citizen should be loyal to theruler rather than loyal to his father or his clan. To further the interest of the ruler, a ruler’s adoptionof the Legalism was associated with a tight control of society. For example, Han Fei thought that
only peasants and soldiers were useful for society. Other professionals such as Confucianism
followers should be prohibited to maximize the number of individuals directly engaging in
Qin Shi Huang united China in 221 BC and he was the first emperor of China. Before this unification, Qin was oneof the states competing for the unification of China. In this paper, Qin is used to refer to both the Qin Dynasty after
the unification of China and the State of Qin before the unification of China.
3
While Han Fei argued in his writing that the trust of the ruler should be ensured before a scholar began advising theruler, he did not get the trust of Qin Shi Huang before he advised Qin Shi Huang. Even though Qin Shi Huang admired
Han Fei’s works, he decided to put Han Fei into jail. Li Si, who was a former classmate of Han Fei and jealous of hisabilities, played a bad role in the death of Han Fei.
4
That is, the purpose of the Legalism school was not to ensure the “rule of law”.

2

7

production. Second, as discussed in the Shang Yang Reform later on, the Legalism emphasized
the usage of incentives to govern.
Third, the Legalism emphasized the usage of institutions in inducing desired behavior. Not
inconsistent with the standard assumption in modern economics that individuals are self-interested,
the Legalism school thought that human nature was bad.5 As an individual could not be trusted,rather than trying to find good individuals to serve the government, this school of thought paid
much attention to the design of institutions to prevent undesirable things from happening. 6 Even
though the ability of the ruler may not be high, if the institutions were well designed, thegovernment would still function well. This was different from the approach of Confucianism
which emphasized that officials should have high moral standards and should be capable. To
prevent powerful ministers from rebelling, the Legalism followers thought that the division of
power should be implemented among officials to ensure the rule of the ruler. To select government
officials, the Legalism school thought that an impartial system such as the Imperial Examination
System should be used.
Fourth, in terms of foreign relations, the Legalism school encouraged the building of astrong army. In the case of the State of Qin, the state was turned into a war machine under the
Legalism influence. For rulers trying to survive the competition among states, the Legalism
approach was more practicable than the Confucianism approach.
The famous Shang Yang Reform of the State of Qin is an example of the application of thethoughts of the Legalism. Before the reform, the State of Qin was not a superpower among thestates. Started at 356 BC, Shang Yang introduced a series of institutional reforms in about twenty
years. Policies tried to provide strong incentives to individuals. 7 First, public land (the “well fieldsystem”) was eliminated and land was privatized. Individuals exclaiming new pieces of land
would be granted ownership of the land. Various policies such as tax policies were established to
attract immigrants and to encourage internal population growth. Second, individuals would beawarded government positions according to their contribution to the government rather than
Han Fei did not think the selfishness nature of individuals would be a problem. In his opinion, the reason that citizens
followed the ruler was because the ruler had the power to reward and punish. If instead citizens did not response to
reward and punishment, it would be very difficult for the ruler to control his citizens.
6
Zhou (2012) has a discussion of the strategies used by rulers in ancient China to prevent internal rebellions. Thosestrategies might weaken the country’s abilities to defend external threats.
7
There were also measures taken to increase productivity. For example, measurement units were united to achieve
economies of scale. When the State of Qin united China, the government provided standards for the writing ofChinese, the size of wagons, and the measurement units at the national level.
58according to their blood. Positions needed to be earned rather than inherited. Significant
punishments and rewards were used to induce individuals to fight for the country rather than for
their clans. Third, various policies increased the direct control of the ruler of Qin over society.
For example, rather than awarding land to vassals to be ruled indirectly, counties were established
to be ruled by the ruler directly. An individual was required to report to the government if hisneighbor engaged in unlawful activities. Institutional reforms introduced by Shang Yang helped
to consolidate resources for the Qin rulers. 8 Even though some other states also engaged in reform,
the Shang Yang Reform was more extensive than other states. As a result, the State of Qin became
a formidable superpower among the states. About 135 years after the reform, Qin Shi Huang wasable to annex the other six major states and achieved unity of China in 221 BC.
Overall, the Legalism tried to provide material incentives to individuals to induce thedesired results. There are pros and cons of the Legalism. On the one hand, the Legalismemphasized institution building. In China’s history, institutions of the Qin Dynasty heavily
influenced the institutions of all following dynasties. On the other hand, the cold-blood promotionof the sole interests of the rulers might actually backfire because citizens might feel aloof under aruler adopting the Legalism as the national strategy of governance. The usage of strong incentives
under the Legalism also led to negative effects. One aspect of the negative effectives is thatcitizens might cheat to take advantage of the incentive system under the Legalism. For example,
when soldiers were rewarded by the number of heads of enemy soldiers cut down in thebattlefields, some soldiers cheated by cutting down the heads of civilians to invite reward. As
individuals were encouraged to focus on material rewards, the Legalism was criticized by
Confucianism followers such as Dong Zhongshu (179 BC – 104 BC) for leading to harsh relations
even within a family: if the son tried to borrow a cue from the father, the father would feel unhappy;
if the mother tried to borrow a rake from the son, the son would be reluctant. Under the Legalism,
if a husband had conducted a crime, the wife should report the crime to the government and would
be rewarded for doing this. Actually, Han Fei argued that a person should not even trust his wifeand his children. For Confucianism followers viewing filial piety as an essential virtue, the above
would be unacceptable.
As the interests of the nobles were harmed by the policies introduced by Shang Yang, some of them tried to sabotage
those policies. When the prince violated the law, his mentors were punished by Shang Yang. Shang Yang was killed
when the incumbent duke (Duke Xiao of Qin) passed away and the prince became the new ruler (King Huiwen of
Qin). However, the policies introduced by Shang Yang were kept.
89

2.3. A Combination of Confucianism and the Legalism
The rule of the Qin Empire did not last long. After the death of the founding emperor Qin
Shi Huang in 210 BC, the Qin Empire collapsed in 206 BC. It is commonly believed that the harshlaws of the Qin Dynasty contributed to the fall of the Qin Empire: two individuals (Chen Shen and
Wu Guang) initiated a rebellion because they would miss the deadline of arriving at the destination
they were supposed to provide their military service. According to the Qin law, missing thedeadline would lead to the death penalty. Rather than waiting to be sentenced to death, theydecided to rebel. Their rebellion led to other rebellions around the country and the Qin Dynasty
eventually collapsed. While the Qin succeeded in unifying China, the fast collapse of the Qin
Dynasty raised an important question: was the fall of the Qin Dynasty a result of the fundamental
flaws of the Legalism or was the fall a result of a wrong application of the Legalism? If the laws
were less harsh as those implemented in the Qin Empire, will the Legalism work?
Liu Che (156 BC – 87 BC), an emperor in the Han Dynasty, is commonly viewed as thefirst ruler attempting to combine the benefits of Confucianism and the Legalism. As a youngemperor, Liu Che had a strong desire to win wars with Xiongnu. Liu Che solicited proposals fromcitizens on strategies to increase the wealth and military power of the country. At that time, Dong
Zhongshu reformulated Confucianism.

Dong Zhongshu incorporated some ideas from theLegalism into his new Confucianism, he also incorporated the ideas that the power of the emperors
was divine and there were unity between deity and human beings. 9 He suggested Liu Che topromote his new Confucianism while to discourage other schools of thoughts. Liu Che adopted
Dong’s suggestions and Confucianism became the national philosophy of China.

The

Confucianism was taught at the national level and it was used to achieve cultural unity in ancient
China.
While the Confucianism received a high status as the essential part of the national
philosophy, rulers knew the limitations of the Confucianism. 10 In practice, institutions were
frequently designed under the principles of the Legalism. 11 However, because the Legalism had a
9
For Dong, if an emperor did not follow the order of the heaven, the heaven would provide some signals such as
earthquakes to warn the emperor. This was a mechanism to provide some restraints on the behavior of emperors.
10
Even though Liu Che elevated Confucianism to a high status, he used government officials with various backgrounds
such as followers of the Legalism school.
11
Wang Mang (45 BC - 23 AC), a controversial figure in China’s history, tried to implement a large-scale institutional
reform according to the principles of Confucianism, was not successful.

10harsh image to citizens and it might alien citizens, a ruler might not want to publicly promote theLegalism as the national strategy of governance.12 Since Liu Che, most rulers in the past two
thousand years of China used a combination of Confucianism and the Legalism to rule. Under thiscombination, local affairs below the county level were handled in the Confucianism style. Clanleaders made various decisions for group members. Consistent with the Legalism approach,institutions were built for the running of the central government. This kind of combination ofConfucianism and the Legalism was sometimes called “ru biao fa li” (a Confucianism exterior
covering the Legalism core).
This combination of Confucianism and the Legalism had its pros and cons. On the one
hand, this combination of Confucianism and the Legalism led to benefits to the rulers and madethe government last longer. The propaganda of Confucianism led to the impression that the rulers
were trying to maximize social welfare, rather than their personal benefits. This warm relationshipbetween the rulers and the ruled decreased the intention of the ruled to rebel. The practice of theLegalism in actual ruling increased the organization capacity and military power of the country
and thus decreased the possibilities that the country would be destroyed by enemies. On the other
hand, because Confucianism and the Legalism school have different and usually opposite policy
implications, conflicts frequently arose. For scholars educated in the tradition of Confucianism,
they would soon find out that the skills needed to pass the Imperial Examinations might not be
relevant to the handling of governmental activities (Lu, 2011).

Sticking to the ideas ofConfucianism produced “loyal” ministers that even the emperors did not feel comfortable with.
To learn the subtle points of handling actual governmental affairs, would-be government officials
frequently practiced as personal aids to government officials if they were luck enough to have thiskind of opportunities.
3. Specification of the model
In this section, we specify the model. There is a ruler who will choose the national strategy
of governance. There are  identical districts in the country. In each district, there are m local
officials. Each local official decides how much public service and labor input to provide. For

G  [0, G] and I  [0, I ] , output in a district is determined by the sum of the level of public service

12

Qin Shi Huang, who promoted the Legalism, had a bad reputation of being cruel.

11

G , sum of the labor input I of local officials, and the average ability of national officials.
Specifically, for  denoting a constant between zero and one and  denoting the average abilityof national officials, the level of output in a district is specified as   G   I 1 . National

output is the sum of output of all districts. A local official’s cost of providing public service G
and labor input I is determined by the sum of public service and labor input. More specifically,for k denoting a positive constant, a local official’s cost of effort is k (G  I ) 2 / 2 .
We assume that the ruler is able to write a contract with a local official on the level of labor
service, but he is not able to write a contract with a local official on the level of public service
provided. However, there is a minimum level of public service g . A ruler would be able to detect
if a local official’s provision of the public service is lower than this critical level. The above
specifications can be motivated as follows. Suppose a local official exerts effort to collect taxes
for the ruler (labor service) and also provides effort to ensure the stability of society (public
service). It could be more difficult to measure a local official’s contribution to social stability thanto measure the amount of tax revenue collected. A local official may use various extraordinary
strategies to collect taxes leading to the resentment of citizens. With a lower level of satisfaction,
citizens may rebel. Prevention of rebellion requires the minimum level of pubic service. Whilethe exact level of satisfaction of citizens may be hard to observe and measure, it is easier to detect
the existence of a rebellion.
There are two approaches in the selection of national officials and thus the determinationof the average ability of national officials. 13 First, a ruler may choose national officials throughhis personal preference. In this case, the average ability of national officials is  , an exogenously
given positive number. Second, the ruler may engage in institution building such as the imperial
examination system to choose the best qualified officials. Let n denote the intensity of institution
building and n  [n, n] . A higher number of n indicates a more intensive effort of institution

In this model, the incentive issue of national officials is not addressed explicitly. This assumption can be justified
as follows. Suppose that national officials were paid fixed salaries and it was easier for the ruler to monitor national
officials than local officials. Alternatively, national officials might be viewed as more motivated by career concerns
than local officials. With more monitoring of national officials or stronger career concerns, the incentive issue ofnational officials would be less significant as compared with that of local officials.
13

12

building. Institution building is costly. 14 Let  denote a positive constant. If the fixed cost of
institution building is  f (n ) , the average ability of national officials is  (n ) . To capture the ideathat a higher level of institution building will result in a higher average level of ability of national
officials, we assume that  ' ( n)  0 and f ' ( n )  0 .15 We also assume that  (n)   and  (n)  . That is, the average ability of national officials chosen formally through institutions is always
better than that of national officials chosen through personal relations.
The ruler may choose from different national strategies of governance. First, when theruler does not provide incentives to a local official’s choices of efforts and national officials arechosen through personal preferences, this strategy of governance is called Confucianism. Second,
when the ruler provides incentives to local officials and chooses national officials through thehighest level of institution building, this strategy of governance is called the Legalism. 16 Third, aruler may use different combinations of Confucianism and Legalism to rule.
4. The first-best outcome
In this section, we study the first-best national strategy of governance in which the levels
of inputs of a local official and the degree of institution building are optimally chosen to maximize
national surplus. The value of national output is [  (n)(mG)  (mI )1  ] . The total cost of efforts
by all local officials in the nation is mk
2(G  I ) 2 and the total cost of institution building for thenation is  f (n ) . The objective is to choose the level of public service and labor input of a local
official, and the degree of institution building to maximize national surplusmkV F     ( n)( mG )  ( mI )1  (G  I ) 2    f ( n) .
2



(1)

Optimal choices of G , I , n require that

One alternative interpretation of the costly institution building assumption is that the appointment of government
officials through personal relations brings more personal benefits while appointment through formal institutions brings
less benefit to the ruler.
15
The specification of institution building costs is similar to the specification of the choice of technologies in Zhou
(2004, 2009). Zhou (2004) provides a discussion of the tradeoff between fixed and marginal cost of production in the
choice of technologies. Zhou (2009) uses the choice of technology approach to address the lack of industrializationin ancient China.
16
If under the Legalism, the level of institutions can be chosen in a continuous way like the first-best case, the main
results of the paper would not change.

1413

 1    (n)G  1 I 1   k (G  I )  0 ,(2a)

 2  (1   )  (n)G  I    k (G  I )  0 ,(2b)

 3   ' ( n)m G  I 1    f ' (n)  0 .

(2c)

The set [0, G]  [0, I ]  [n, n] is a lattice with the usual ordering. Partial differentiation of(1) leads to

 2VF
 2VF
 2VF
 0,
0,
 0 .17
GI
Gn
In

(3)

The following proposition studies the impact of a change of the level of the cost of exerting
effort on the levels of inputs and the intensity of institution building.
Proposition 1: In the first-best case, the levels of public service and labor input of a local
official, and the intensity of institution building decrease with the cost of effort.

 2VF
 2VF
 0,
 0 , and
Proof: Define t  k . Partial differentiation of (1) leads to
Gt
It
 2VF
 0 . From Topkis (1998, chap. 2), the objective function (1) is supermodular in G , I , n ,ntand  k . Maximizing a supermodular function on a lattice, G , I , and n decreases with k .
From Proposition 1, an increase of a local official’s cost of effort will decrease the incentive
to build institutions for the selection of national officials. 18 The reason is that an increase of a local
official’s cost of effort decreases the marginal benefit of a more intensive institution building. As
a result, less institution building should be chosen.
Rosenthal and Wong (2011) have argued that the huge size of ancient China comparedwith a given country in Europe could be used to explain the divergence between ancient China andEurope in terms of achieving industrialization independently. The size of a country can be

By using (2a) and (2b), it can be shown that 1 / I  0 and  2 / G  0 .
Similar to the proof of Proposition 1, it can be shown that in the first-best case, the objective function (1) issupermodular in G , I , n , and  . Thus, the levels of public service and labor input of a local official, and theintensity of institution building decrease with the cost of institution building. To understand this result, the marginal
benefit of more public service or labor input by a local official decreases when the average ability of national officials
is lower. As a result, the equilibrium levels of public service and labor input by a local official decrease with the costof institution building.
17

18

14

captured by an increase of the number of administrative regions in this model. The following
proposition studies the impact of a change of the number of administrative regions on the choiceof effort levels of a local official and the intensity of institution building.
Proposition 2: In the first-best case, the levels of public service and labor input of a local
official, and the intensity of institution building increase with the number of administrative regions.
Proof: Partial differentiation of (1) leads to

 2VF
 2VF
 2VF
 0,
 0 , and
 0 . Thus
G
I
n

(1) is supermodular in G , I , n , and  . From Topkis (1998, chap. 2), G , I , and n increases
with  .
From Propositions 1 and 2, there is complementarity between incentive provision to local
officials and institution building. Higher efforts of local officials will lead to more institution
building in the selection of national officials, and vice versa.
5. Performance of different national strategies of governance
The first-best case may not be feasible in reality. In this section, we study the performanceof different feasible strategies of governance: Confucianism, the Legalism, and combinations ofConfucianism and the Legalism. Then we compare the performance of different strategies ofgovernance.
5.1. Performance of Confucianism
In this subsection, we study the scenario that the ruler uses Confucianism as the national
strategy of governance. Under Confucianism, the ruler will deal with a community (in this model,
a district) rather than deal directly with a local official. Compared with a lump-sum tax, a nonlump sum tax may decrease local officials’ incentives to provide public service and labor input
and thus decreases total social surplus. Since rulers under Confucianism are assumed to maximizesocial welfare, we assume that the ruler charges a lump-sum tax from a district under
Confucianism. Because a lump-sum tax is a transfer between the ruler and a district and it may
not affect the total amount of surplus, we do not study the determination of the lump-sum tax under
Confucianism. Instead, we focus on the total amount of surplus under Confucianism.
15

For a local official, let the level of public service provided by all other local officials in thesame district be G i and the level of labor service provided by all other local officials be I i .
Since Confucianism emphasizes family value, here we assume the level of output produced in a
district is shared equally among the m local officials.

In each district, total output is G  G i   ( I  I i )1  and a local official’s share is  G  G i   ( I  I i )1  / m . A local
official’s cost of effort is k (G  I ) 2 / 2 , thus his payoff isG  G i  ( I  I i )1 mk(G  I ) 2 .
2(4)

A local official takes the levels of public service and labor service provided by other local
officials as given and chooses his own levels of public service and labor input to maximize his
payoff (4). A local official’s optimal choices of G and I require that  G  G i   1 ( I  I i ) 1 m k (G  I )  0 , (1   )G  G i  ( I  I i )  m(5a) k (G  I )  0 .

(5b)

Let a subscript of C denote the equilibrium variables under Confucianism. In a symmetricequilibrium, local officials provide the same level of public service and the same level of labor
input. Thus equations (5a) and (5b) become the following two equations showing that the levelsof public service and labor input provided by a local official decrease with the cost of effort of a
local official:  GC  1 I C 1 m k (GC  I C )  0 , (1   )GC  I C  m k (GC  I C )  0 .

(6a)
(6b)

From equations (6a) and (6b), the level of public service and the level of labor input of a
local official decrease with the number of local officials in the same district. Thus under
Confucianism, there is a free rider issue in the provision of inputs.
Under Confucianism, the national level of surplus ismk
Vc     ( mG c )  ( mI c ) 1  
Gc  I c 2  .
2



16

(7)

Partial differentiation of (5a) and (5b) leads toVc m   (Gc )  1 ( I c )1   k Gc  I c   0 ,
G c

(8a)

Vc
 m  (1   )(Gc )  ( I c )    k G c  I c   0 .
Lc

(8b)









From (8a) and (8b), under Confucianism, an increase of the level of public service or labor
input of a local official will increase total amount of surplus. That is, the level of public service
and labor input of a local official under Confucianism is lower than the first-best case.
5.2. Performance of the Legalism
In this subsection, we study the scenario that the ruler uses the Legalism as the national
strategy of governance. Under the Legalism, the ruler could deal with a local official directly
rather than through a community. Suppose the ruler provides the following incentive mechanism
for each local official: the ruler charges a fixed fee of z and provides a unit reward of w for each
unit of labor service provided by a local official. Since a local official is not rewarded forcontribution on public service G , a local official will provide the minimum level of public service
g . For a local official, his income is wI and his cost of providing g units of public service andI units of labor is k ( I  g ) 2 / 2 . A local official chooses the level of labor input to maximize his

net benefit
wI k(I  g ) 2  z .
2(9)A local official’s optimal choice of labor input requires that
I

w
g.
k

(10)

Let the reservation utility of a local official be R . From (9) and (10), the net benefit of a
local official isw2
 wg  z . The ruler will choose the fixed fee so that the payoff of a local
2k

official is equal to this official’s reservation utility. As a result, the ruler sets the fixed fee equaling
tow2
 wg  R . Under the Legalism, the ruler’s total revenue is the sum of output produced by
2k

17

all districts   (mg )  mI 

1 

and fixed fee collected from all local officials  m(w2
 w g  R) ,2k

and his total cost is the sum of the cost of inducing labor inputs  wI and the cost of institution
building  f (n) . Thus the ruler’s payoff is[  (mg )  mI 1   mwI  m(w2
 w g  R )]   f (n) .
2kPlugging the level of labor input from (10) into the above expression, the ruler will choose thelevel of reward w to maximize1 
arg max 

mw 2
mw



   (mg ) VL   f (n)  mR  .
 mg  

w 
2k

 k



(11)

An application of the Envelope theorem on (11) reveals that the ruler’s payoff decreases
with the reservation utility of an individual. Thus if possible the ruler has an incentive to decrease
the reservation utility of a citizen. In this model, we have assumed that the reservation utilities of
local officials to be exogenously given. This assumption can be motivated by arguing that there
is a lowest limit of the level of utility for a citizen because citizens might rebel if their utilities
become too low. Sometimes a citizen’s reservation utility is not exogenously given and can beaffected by the policies of the ruler. This observation is useful in understanding why thegovernment adopted the Legalism approach in China’s history tried to control the activities ofcitizens, such as the restriction of career choices and the mobility of citizens under Guan Zhong of
the State of Qi.19 Those kinds of restrictions would decrease the reservation utilities of citizens
and the ruler’s costs of providing incentives to citizens, and thus increase the payoff of the ruler.
The ruler’s optimal choice of w requires thatw  (1   )  g    g 
k




 w 0.

(12)

An increase of  means that the role of public service in the production of output increases.
The following proposition studies the impact of a change of the share of public good in the
production of output on the incentive provided to a local official.

Restriction of the mobility of citizens was followed by other political regimes, such as Shang Yang of the State of
Qin and the Ming Dynasty (1368 - 1644).

19

18

Proposition 3: Under the Legalism, dw / d  0 if and only if




g
 1 0 .
(1   ) ln
w

 g
k


Proof: From (11),(13)

 2V L 0 if (13) is satisfied. Thus, if (13) is satisfied, VL is submodular
w

in w and  . As a result, dw / d  0 .
When g is small, (13) is more likely to be satisfied. From Proposition 3, when the levelof minimum public service is small, a ruler offers less incentive to labor service provided by alocal official if the share of public service in the production of output increases.
The following proposition studies the impact of the level of the minimum level of public
service on the ruler’s choice of incentives to local officials.
Proposition 4: Under the Legalism, dw / dg  0 .
Proof: Partial differentiation of (11) leads to 2V L 0 . Thus, VL is supermodular in w
wg

and g . Thus, dw / dg  0 .
To understand Proposition 4, since public service and labor input of a local official arecomplementary in the production of output, a higher level of minimum public service will increase
the marginal product of labor service and thus increases a ruler’s provision of incentives to a local
official.
5.3. Performance of combinations of Confucianism and the Legalism
In this subsection, we study the scenario that the ruler uses different combinations of the
Confucianism and the Legalism as a national strategy of governance. There are two ways tocombine Confucianism with the Legalism.
First, suppose that the efforts of local officials are determined by the Confucianism
approach, while the choice of national officials is determined by the Legalism approach. Under
19this combination of Confucianism and the Legalism, a local official in a district choose the levelsof labor input and public service to maximize G  G i   ( I  I i ) 1 mk(G  I ) 2 .
2(14) k (G  I )  0 ,(15a)

Optimal choices of G and I require that  G  G  i   1 ( I  I i ) 1 m

 (1   )G  G  i   ( I  I i )  m k (G  I )  0 .

(15b)

A comparison of (5a) and (5b) with (15a) and (15b) reveals that a local official provides
higher efforts under this combination of Confucianism and the Legalism than that under
Confucianism.
Let a subscript of CL denote the equilibrium variables under this combination ofConfucianism and the Legalism. For GCL and I CL defined in (15a) and (15b), the national surplus
produced under this combination is

VCL   (mGCL )  (mI CL ) 1    f (n) .

(16)Second, suppose the levels of labor input and public service of a local official are
determined by the Legalism approach, while the choice of national officials is determined by theConfucianism approach. In China’s history, this combination of the two schools of thoughts wasless common than the first combination. In this case, the ruler chooses the level of incentives tolocal officials to maximize his total surplus1 
arg max 
mw 2   mwVLC .
 mg    (mg ) 

w
2k 

 k


(17)

The ruler’s optimal choice of w requires thatw
 (1   ) g   g 
k





 w0.

(18)

A comparison of (12) with (18) shows that the level of incentive provided to a local official
under this combination of Confucianism and the Legalism is lower than that under the Legalism.

20

5.4. Comparison of Different Strategies of GovernanceIn this subsection, we compare different national strategies of governance and discuss theconditions under which a strategy would be optimal for the ruler.
The following proposition compares the marginal incentives for labor input under the
Legalism and that under Confucianism. This proposition confirms the traditional wisdom that the
incentive provided to a local official under the Legalism is stronger than that under Confucianism.
Proposition 5: The marginal incentive provided to a local official under the Legalism isstronger than that under Confucianism.
Proof: Under Confucianism, from (5b), the marginal incentive to a local official for each
additional unit of labor input is k (G c  I c ) . Under the Legalism, from (9), the marginal incentive
to a local official for each additional unit of labor input is w  k ( g  I ) . We want to show thatg  I  Gc  I c if the Legalism is the best feasible strategy. If g  I  Gc  I c , from (8a) and(8b), since the level of public service and the level of labor input are lower than those in the firstbest case, for a given level of average ability of national officials, the total surplus increases if
there is a switch to the Confucianism because the total amount of inputs is higher and the allocationof inputs is unconstrained under Confucianism.
From (7), (11), (16), and (17), the ruler’s choice of the national strategy of governance isaffected by various factors. First, when the cost of institution building is low (  decreases), theruler will be more likely to use institutions in the selection of national officials. Second, if the
spread of the distribution of talents in society is sufficiently high (    increases), the ruler will
be more likely to use institutions in the selection of national officials. Third, when the minimum
enforceable level of public service is high, the ruler will provide more incentives to local officials.
Fourth and finally, when the number of administrative regions increases, the ruler will be more
likely to adopt formal institutions to select national officials.
In China’s history, rulers frequently used the first combination of Confucianism and theLegalism (payoff in equation (16)) as the national strategy of governance: local affairs werehandled by clans and government officials above the county level were chosen mainly throughexaminations. This strategy would be the best feasible strategy when the level of minimum public
21

service was low and the number of administrative regions was high. This strategy would also be
desirable from the following perspective. We have assumed that each individual is concerned withhis own payoff only. Under the moral teaching of Confucianism, each individual could also careabout the welfare of other relatives. With this change of the preferences of a local official, thefree-rider issue can be partly avoided and each local official would provide higher efforts.
6. Conclusion
In this paper, we have studied a ruler’s optimal choice of the national strategy ofgovernance in ancient China in a formal model. Under Confucianism, since local officials in thesame district share local output, there is a free rider issue. Also, since national officials are chosen
through personal preferences, most capable persons may not be chosen. Under the Legalism, theruler provides incentives to local officials which may lead to side effects. National officials arechosen through formal institutions and more capable persons are more likely to be chosen.
However, institution building is costly. The cold-blood image of the Legalism may alien citizens.
By exploiting the paternalistic relationship between the ruler and the ruled under Confucianism
and the strength of institution-building under the Legalism, the ruler may benefit from a
combination of Confucianism approach and the Legalism approach as the national strategy ofgovernance. As each strategy has its pros and cons, which strategy of governance is optimal
depends on factors such as the minimum enforceable level of public service, and the level of
institution building costs.
In this paper, we have assumed that the economy has only one sector of production. When
there are multiple sectors of production, whether the ruler should provide incentives to officials ina sector depend on the specific features of this sector. Suppose there are a civilian sector and a
military sector. Compared with the civilian sector, the ruler would be more likely to provide
incentives to the military sector because the tasks performed by the military sector would be
simpler than the tasks performed by the civilian sector: the main function of the military sector is
to win a war while the function of the civilian sector can be more complicated and more difficult
to measure. Thus, a ruler may not provide strong incentives to civilian officials while at the sametime he may provide strong incentives to military officials.

22

Acknowledgments
I thank Professor Yang Jingnian of Nankai University and Professors Chen Ping and Xu Luodanof Zhongshan University for their many years of advice and encouragement. I also thank the editor
Professor Tian Guoqiang and an anonymous referee for very valuable suggestions. I am solely
responsible for all the remaining errors.

23

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