Transaction Costs and Peasants′ Choice of Institutions: Did the Right to Exit Really Solve the Free Rider Problem in Chinese Collective Agriculture?

Abstract

A recent attempt to explain China′s agricultural crisis of 1959-1961 argues that collective agriculture failed because the low-cost substitute for costly monitoring, the exit penalty, available during 1955-1958, was taken away. Exit right is arguably an effective mechanism for disciplining effort because members need only to examine changes in publicly observable output to ascertain the degree of shirking in the team. This new theory of decollectivization is, however, undermined by the evidence that, first, monitoring was an essential feature of Chinese agriculture during the period in question, and, second, the alleged exit right was not respected. J. Comp. Econom., June 1993, 17(2), pp. 485-503. Hong Kong Polytechnic, Hung Hom, Kowloon, Hong Kong, China.