This paper shows the way shifts in property utilization rights institutions may
induced another sequence of market and institutional changes. It is the first systematic
analysis that show land use rights institution changes led to the rise of rural-urban labor
migration from 1980 to 1984, a critical period in the country’s market transition. I
demonstrate that the 1980s Household Responsibility System (HRS), which brought
family farming back from the communal system, endowed rural households not only with
land use rights but also with de facto labor allocation and output control rights. These
shifts in property relations promoted informal institutions such as informal farm product
markets and informal urban labor markets. The emergence of informal institutions not
only may have made labor retention policies such as the commune system and the small
township strategy ineffective, but also may have given an incentive to the government to
deregulate its subsequent labor market policy. Generalizing from these arguments, I
claim that the informal economy reduced the state’s monopoly power generated from
labor market policy rigidities and helped create long-run Pareto improving deregulations,
which in turn induced the emergence of a Pareto improving institutional arrangement.