Building Trust before Losses: Changing China’s Partnership Default Rule from Actual to Subscribed Capital Contributions?

Default rules for profit and loss allocation in partnerships are almost universally symmetrical, yet this article demonstrates that such symmetry reflects a policymaking bias rooted in behavioural loss aversion. Focusing on China’s Partnership Enterprise Law, we argue that while actual (paid-up) capital is an appropriate benchmark for profit distribution, loss allocation should instead be governed by subscribed capital. Through a law and economics model, we show that actual capital rules disincentivise contributions during downturns, fostering collective inefficiency and eroding partner trust, whereas subscribed capital rules mitigate prisoner’s dilemmas and promote resilience. Case law analysis confirms these dynamics. To strengthen the normative basis of reform, we situate the subscribed capital rule within Chinese cultural philosophy, drawing on Confucian trust, Taoist interdependence, and Buddhist notions of giving and gaining. This interdisciplinary framework offers a novel model for partnership governance that addresses both economic incentives and social cohesion. In so doing, the paper contributes a fundamental rethinking of default rules in partnership law, with implications for comparative law, creditor protection, and global debates on organisational resilience.