Land readjustment: an innovative urban experiment in China

Abstract

Conventionally, urban renewal initiated by the private sector is not that different from other trading activities. A developer purchases property rights from the suppliers, who are the property owners of the renewal site, in the open market for a price. Once the deal is done, the suppliers are out of the picture and the developer moves on to the renewal project and starts replacing the existing structure with new buildings for a better use. The developer would prefer not to have the individual owners involved in the renewal process for various reasons such as management problems and profit sharing. From an institutional economic perspective, this is a classic example of market governance structure as the asset is non-specific to a certain extent and the developer is not integrating the supplier (property owners) into the firm. However, on some rare occasions, the developer may adopt a bilateral firm governance structure by incorporating the individual property owners. This, in the context of rural land renewal, has been known as the land readjustment model. Based on the theoretical framework of institutional economics and transaction cost theory, this paper explores the rationale behind the developer and even the public authority choosing to adopt this model in the process of urban renewal by examining two examples in two very different cities in China.