also often points towards inappropriate institutions as a root cause of inappropriate policies (Acemoglu 2003) or a deterrent to human capital accumulation (Acemoglu and Johnson 2005). Adding specific information on key aspects of the regulatory environment (World Bank 2006) has helped to open up a new direction in the comparative economic literature (Djankov 2003).<sup>2</sup> This has put institutions squarely on the policy agenda, remaining methodological challenges notwithstanding (Przeworski 2004, Bardhan 2005), Third, use of firm level data provides an option to overcome the econometric and substantive limitations inherent in cross-country regressions. For Eastern European countries, the fact that firms reinvest their retained earnings in situations where property rights are strong but do not do so in environments characterized by weak property rights is interpreted as providing support to the hypothesis that property rights are more important than financing constraints (Johnson _et al._ 2002). This is in line with the much greater relevance of property rights as compared to contracting institutions on economic growth that emerged from cross-country regressions (Acemoglu and Johnson 2005). Firm level evidence from China also suggests that insecurity of property rights is an important obstacle to firm growth in this environment, although financing constraints emerge as important as well (Cull and Xu 2005).

If institutions, especially those making property rights more secure, are indeed critical for economic development, ways to bring about changes of a country’s institutions, in particular its system of property rights, assume great importance. As powerful interests or representatives of the state who benefit from the status quo often have means to forestall change (Frye and Zhuravskaya 2000, Sonin 2003, Hoff and Stiglitz 2004), adoption of the most appropriate institutions is far from automatic (Acemoglu 2003). Land in China is of interest for a study of the effectiveness of legal reform not only because of the country’s wide variation in social, ecological, and economic conditions but also because new legal provisions aiming to endow cultivators with more secure rights may be opposed by local bureaucrats who often derive considerable power and possibly material gains from their ability to control land.

While private property rights provide incentives for optimum levels of investment and land management within the confines of a given plot, a wide range of land uses such as road networks or public buildings exhibit strong public good characteristics. Demand for these tends to increase disproportionately with economic growth.<sup>3</sup> Externalities from these and the difficulty of excluding users or set prices in line with individuals’ marginal valuation of the services provided would imply that the private sector would not provide these at sufficient quantity or scale, thus providing an argument in favor of public provision (Shavell 2003, Lueck and Miceli 2006). The large amounts of land needed, together with the fact that

> 2 The indicators used measure the costs, in terms of time and resources, of starting a business, hiring and firing workers, registering property, getting bank credit, protecting equity investors, enforcing contracts in the courts, and closing a business. All of them are based on surveys of local lawyers, thereby providing a characterization of the business environment that is more precise than available cross-country indicators and that can more readily be used as a basis for reform (Djankov _et al._ 2005).

> 3 In major US cities, between 25-35% of developed land is estimated to be accounted for by public rights of way, mostly streets (Shavell 2002).

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