Abstract
Post-1978 reforms in China implemented the Household Responsibility System to replace collective agriculture.Some villages resisted the new policy and remained collective. Interestingly, these villages achieved remarkable prosperity in the post-1978 era.
I describe the organizational structure of these villages, and I attempt to explain their economic success. I argue that the prosperity of the collective villages is explained with self-selection and the introduction of market incentives.
Specifically, only the villages which were able to exploit the economies of scale and mitigate moral hazard remained collective after the reforms. Market incentives provided additional motivation to address the moral hazard.
This explanation is consistent with the fact that the Household Responsibility System led to higher productivity than the earlier system of People's Commune. Nevertheless, the case of collective villages illustrates the fact that the problem of the Household Responsibility System was its universal character.
Just like the system of People's Commune, the new policy was an attempt to impose one organizational structure on all agricultural production while leaving little room for organizational diversity