Jiaolong Co. built a city by being a central contractor, which acquired planning rights by contract, & signed a series of tax sharing contracts with government, farmers, tenants, & businesses, reducing greatly the transaction costs

From 2016... The Contractual Nature of the City. Qian Lu. Man and the Economy Volume 3 Issue 1, 2016. DOI 10.1515/me-2016-0013

Abstract: Urbanization is a process in which separated and dispersed property rights become concentrated in a specific location. This process involves a large volume of contracts to redefine and rearrange various property rights, producing various and high transaction costs. Efficient urbanization implies the reduction of these costs. This paper studies how efficient urbanization reduces transaction costs in the real world, based on a series of contracts rather than the coercive power. Specifically, this paper shows that Jiaolong Co. built a city by being a central contractor, which acquired planning rights by contract, and signed a series of tax sharing contracts with government, farmers, tenants, and business enterprises. These contractual arrangements greatly reduced the transaction costs and promoted the development.

Keywords:urbanization, contractual structure, transaction costs

Excerpts:

Jiaolong is a city built and operated by a business corporation. This is rare in China because in most cases the local city government is in charge of urbanization. In almost all cities, government makes land and city planning, takes farmers’ land, builds city infrastructure, sells land to housing developers and manufacturers, operates police stations, hospitals, schools and universities. By holding the monopoly power of coercion, the government is able to pool together resources by fiat and hold transaction costs low.

The urbanization of Jiaolong is not based on coercive power, but by a series of contracts with Shuangliu government, firms, farmers, residents and other relevant parties. As the central contractor, Jiaolong Co. is able to simplify the contractual web and reduce coordination cost. The essential contracts are the investment contract with the county government to transfer planning rights, and a series of contracts with the government and firms to share tax. Tax sharing contracts define the income rights for Jiaolong so that Jiaolong could share the surplus of urban development and infrastructure construction. Sharing contracts also motivate Shuangliu government to provide public services including protection of property rights. A series of contracts transfer planning rights, land use rights, and income rights to Jiaolong Co., and thereby endogenize the externality of infrastructure building and urban development. From the perspective of institutional change, Jiaolong offers a case of contract-based rather than coercion-based urbanization, the latter being the typical approach in China.