INCENTIVE TO WORK VERSUS DISINCENTIVE TO INVEST - THE CASE OF CHINA RURAL REFORM, 1979-1984

An institutional change from the communal system to the household resp onsibility system in rural China brought about an increase in producti vity during 1979-1984, but it has also opened up a set of new problems , including decreased investment. I argue that the new responsibility system is effective in providing work incentives to peasants by render ing residual claims, but not so in internalizing positive externalitie s of investment, resulting in underinvestment. Remedies such as agricu ltural investment subsidies, investment tax credits, the roles of such institutions as township and village enterprises in undertaking inves tment in agricultural infrastructure, and most fundamentally, well-def ined property rights are discussed. (C) 1996 Academic Press, Inc.