Weak Property Rights and the Emergence of Labor Markets in Rural China

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In transitional and developing economies, examples abound of ways in which existing institutions and norms either hinder or promote the widening of markets. By reforming institutions that distort individual and firm decisions, informed policymakers usually hope to increase responsiveness to market signals, facilitate more efficient allocation of resources, and promote long-term growth. At the same time, important reforms can be politically difficult to implement if the institutions involved provide security to individuals who are not able to benefit from opportunities provided by greater access to markets. This research examines the trade-off between responsiveness and security from the perspective of villages in rural China. Since the beginning of China's reform period over twenty years ago, local village leader control over decisions about land allocation has helped to insure that all rural residents have access to farm income. Insecurity of land tenure, however, distorts incentives of farmers and may limit household response to opportunities provided by access to off-farm markets.