Small Property, Big Market: A Focal Point Explanation

Abstract

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.