Shitong Qiao

Small Property, Big Market: A Focal Point Explanation

This article investigates the formation and operation of a market of informal real estate in China, referred to by the term “small property” (xiaochanquan), as their property rights are “smaller” (weaker) than those of the “big” (formal) property market. In the city of Shenzhen, which experienced exponential population growth from 300,000 to more than ten million between 1978 and 2010 as the first experimental site of China’s market reforms, almost half of the buildings are small-property constructions. These illegal buildings, which lack legal titles and are concentrated in 320 intra-city villages, house most of the 8 million migrant workers in Shenzhen and are the main source of livelihood of the more than 300,000 local villagers.The underlying question is how to coordinate people’s behaviors in the absence of centralized law. A problem of coordination arises when players have to combine their actions in a certain way among multiple possibilities. In other words, coordination games have multiple equilibria, and therefore the payoffs alone do not determine the behavioral outcome. Instead, the final outcome depends on the specific social settings and individual participants involved, leaving room for less concrete variables, such as history and politics, to impact individuals’ choices. Nobel Laureate Thomas Schelling first observed that, in situations requiring coordination, anything that makes salient one behavioral means of coordinating tends to produce self-fulfilling expectations that then lead to the occurrence of that result. This salient solution is called a focal point. The essential idea of the focal point is that the intrinsic magnetism of particular outcomes makes them qualitatively differentiable from the continuum of possible alternatives.Set against the backdrop and context of China’s market transition, this research discovers that the political, legal, and economic transition in Shenzhen made rural land development and transfer the focal point, despite its illegality. This focal point coordinates players’ expectations to converge on the same equilibrium in the formation and operation of the small-property market. I model the formation of the small-property market as an Assurance Game among social entrepreneurs in Shenzhen, the demolition risk as a Hawk-Dove Game between the Shenzhen government and farmers, and contract risk as a Hawk-Dove Game between a buyer and a seller. This research enriches our understanding of market institutions by applying up-todate insights from coordination games and focal point theory. It also contributes a significant real world example to the theories of coordination games and focal points, most of which are based on laboratory experiments.

The Evolution of Relational Property Rights: A Case of Chinese Rural Land Reform

The most notable, or at least the most noted, form of property evolution has been the transfer of exclusive rights from collectives to individuals and vice versa, such as the farm collectivization in Soviet Union and the establishment of the People’s Communes in Mao’s China and their reversals. Such radical moments, however, constitute only a small part of history. For the most part, property rights evolve quietly and incrementally, which is hard to explain if we take exclusive rights as the core of property, or, to put it more generally, if we are focusing solely on the question of who owns the things. To describe the evolution of property rights in China, we employ the concept of relational property. It is a concept that is heavily influenced by Joseph William Singer’s “social relations model” and Ian Macneil’s “relational contract” and, in particular, their emphasis on the determinative role of social relations in the construction of property and contract rights. The bundle of sticks metaphor is at the heart of relational property because it recognizes that property rights can be, and often are, disaggregated as they adapt to changing social, economic, and technological demands. As we show in the context of the reform of Chinese rural land, the combination of the metaphor of separable interests — the sticks in the bundle — and the dependence of property interests on social relationships can explain the evolution of property rights more accurately than a perspective that stresses a single central meaning of property.

Small Property, Adverse Possession and Optional Law

“How to deal with these illegal buildings?” was the question I was frequently asked in my interviews with government officials in Shenzhen, a Chinese city in which almost half of the buildings were built illegally. To demolish them has proved to be a mission impossible; to legalize them would encourage more illegal buildings. People in China call these illegal buildings small-property houses (xiaochanquan in Chinese) because their property rights are “smaller” (weaker) than those on the formal housing market, which have “big” property rights protected by the government. I frame this Chinese conundrum as an adverse possession question and resolve it by utilizing the optional law framework developed by Ayres. My argument is that the allocation of initial options matters at least as much as the allocation of initial entitlements and that options should be granted to parties that have the best information to make decisions, which in the small-property case, are the numerous individual owners rather than the government. I find that in an effort to grandfather-in existing small properties and deter further development of small properties, the Shenzhen Municipal Government in the last two decades has adopted land use policies that can be neatly categorized into the five rules of legal entitlements under the optional law framework. The only missing rule, Rule 5, also provides a solution to a certain type of cases.

Governing the Post-Socialist Transitional Commons: A Case from Rural China

When the collective declines, who manages the collective-owned land? When the socialist state fails, who possesses the state-owned river? This Article concerns the governance of land and natural resources that are still owned by collectives or the state in rural China. No effective community governance has evolved in rural China to fill the authority vacuum left by the dissolution of the people’s commune system. As a result, such land and natural resources have become real commons. In describing these I use the term “transitional commons” to indicate both the crucial influence of the transitional political legal environment in their emergence and evolution and their inherently transitional character. Transitional commons are often in crisis. The tragedy of the commons occurs when the cost of exclusive use is too high. When the benefit of exclusive use exceeds the cost, competing property claims arise over the common resources. I argue for an integrated approach to govern the transitional commons from the ground. Successful management of the transitional commons requires more than choosing the right property institution. A capable state and a well-functioning community are necessary to make the property institution, whichever it is, work. Rule of law is necessary to define the basic structure of a society and to guarantee the normal operation of the community self-governance. Self- governance can increase social capital for the local community to develop local consensus on property arrangements.

Binding Leviathan: Credible Commitment in an Authoritarian Regime

The problem of credible commitment dogs every government, whether democratic or authoritarian. Governments that have sufficient power to begin a project can often change their minds. Paradoxically, such omnipotence can be crippling. If lenders cannot be assured that a current mayor’s successors will repay loans, then they may charge him or her extortionate interest rates. If homebuyers suspect that a mayor’s touted plans to improve the schools, police, the environment, or any other long-term project, will be abandoned by his or her successor, then they will discount their bids on the city’s land, reducing the capitalization of good government and discouraging the current mayor from even attempting such long-term improvements in the first place. Authoritarian bureaucracies face special credible commitment problems. Fear that local officials will build up a local power base has historically induced the leadership of China, imperial and Communist alike, to transfer local officials among subnational jurisdictions frequently. Such frequent transfers undermine those officials’ capacity to make the credible commitments that officials with more stable tenure can make with ease. Moreover, authoritarian regimes discourage the development of independent institutions like investor-owned banks or locally elected legislatures that are independent from local executive officials and that might otherwise act as monitors and enforcers of long-term commitments. We describe how these problems of credible commitment posed by China’s cadre transfer policy and, more generally, the CCP’s distrust of divided power lead to excessive municipal debt in China. We also propose three new institutional solutions for resolving the credible commitment problem of China’s authoritarian regime. In the end, we conclude that there is no magical solution that can reassure stakeholders such as lenders or home-buyers that an autocratic mayor will follow through on his or her promises. All of our proposed solutions, however, trade on the intuition that even modest institutional limits on power, compatible with China’s one-party system, of democratic centralism, can mitigate the problem of powerlessness ironically created by authoritarian power.

China’s Changing Property Law Landscape

This chapter provides an outline of the changing Chinese land regime, including the past, present, and future of land expropriation, small or informal property rights, and rural land reform. We argue that the evolution of Chinese land law exhibits three characteristics. First, law serves as the final confirmation of policy reforms, rather than the precondition of the reform. Second, there is no individual land ownership, and public land ownership (including both state land ownership in the urban area and collective land ownership in the rural area) still matters. Third, due to the rapidly changing nature of the Chinese economy and society, property rights in action are often a pale shadow of what their legal entitlements would indicate in theory. As a result of these three characteristics, Chinese land law poses two related challenges to conventional property theory. First is one of the rarely questioned verities of economic theory: that clear, secure, and judicially enforceable property rights are an essential – perhaps the most essential – prerequisite to economic growth. The second question grows directly out of the first. China’s growth has come through voluntary market exchange on a massive scale, and in this sense fully vindicates economic theory. The challenge is to understand how these markets – in our case, the real estate market – operate without the legal framework considered necessary for Coasian bargaining. We propose a relational property theory as one explanation of what has enabled the market, without any legal rules or judicial enforcement, to thrive on a literally global scale. Relational property emphasizes the determinative role of social relations in the construction of property. The most important normative implication is that relational property can function without the full and faithful implementation of formal property law; but property law cannot function without embedding itself in social relations.

Voice and Exit as Accountability Mechanisms: Can Foot-Voting Be Made Safe for the Chinese Communist Party?

According to Albert O. Hirschman’s famous dichotomy, citizens can express their preferences with their “voice” (by voting with ballots to elect better representatives) and “exit” (by voting with their feet to choose better places to live). Suppose, however, that ballot-voting is ineffective: Can exit not merely aid but also replace voice? Using as a case study the People’s Republic of China, a party state without elective democracy, we argue that exit is not a substitute for, but rather a complement to, voice. China’s bureaucratic promotion system plays the role of local elections in the United States, promoting or replacing local officials based on their performance in office. In either regime, however, it is costly for local voters (in the United States) or the Chinese Communist Party (in China) to monitor and assess local officials. Attention to foot-voting in the legal design of local government can help reduce these costs. By evaluating cadres who run the lower levels of China’s local governments on the basis of how successfully they attract mobile households, the central CCP authorities could reduce the costs of monitoring these local officials and thereby reproduce, by bureaucratic means, some of the benefits of electoral democracy. Success in attracting foot-voters can be most cheaply measured by the Party’s evaluating cadres primarily on the basis of local land values which, because they are a product of foot-voters’ decisions about where to live, function like ballots insofar as they reflect the popularity of local cadres’ policy decisions with mobile Chinese households. For foot-voting to improve governmental accountability, however, the Chinese system of local government law requires some basic but politically feasible reforms ― in particular, the introduction of a local property tax system, the creation of a federated city system that grants power and autonomy to sub-city units, and the liberalization of China’s household registration system to make the population fully mobile across different jurisdictions.