Truncated Property Rights, Land Finance, and Grassroots Governments: A Case Study of Minor Property Rights Housing in Transitional China

Abstract

The purpose of this paper is to discuss the institutional foundations of the black market of “minor property rights housing” (MPRH), the informal housing supply in transitional China. The emergence of MPRH has stemmed from China’s dualistic land system where rural land owns collectively but the conversion of rural land into urban land use is monopolized by the state. The dualistic land system is compounded by a dualistic household registration structure—the Hukou system in which citizens are restricted to either farm or city household, but unable to switch freely. Consequently, the land property rights and central–local fiscal relations exert intrinsic influences on MPRH’s suppliers—the grassroots governments. On one hand, the coercive policies to strictly regulate rural land usage expropriate the rights and opportunities of farmers and grassroots organizations to participate in the land market. On the other hand, the current fiscal system has prevented grassroots governments from obtaining land revenue. The state, however, has no control over all attributes of collective-owned land due to transaction costs. Grassroots governments and peasants can manipulate some attributes of land property rights to minimize the loss. Accordingly, the rise of MPRH reflects the rational choice of grassroots governments and farmers to mitigate institutional constraints. However, as an institutional arrangement with multiple functions, MPRH also has important effects on income redistribution. In other words, village cadres take advantage of their power to manipulate collective land for rent-seeking activities. This reflects the inefficiency of MPRH.