in Yun-chien Chang (ed), The Law and Economics of Possession
Cambridge University Press, May 2015, pp 290-319
Abstract: “How to deal with these illegal buildings?” was the question I was frequently asked in my interviews with government officials in Shenzhen, a Chinese city in which almost half of the buildings were built illegally. To demolish them has proved to be a mission impossible; to legalize them would encourage more illegal buildings. People in China call these illegal buildings small-property houses (xiaochanquan) because their property rights are “smaller” (weaker) than those on the formal housing market, which have “big” property rights protected by the government. I frame this Chinese conundrum as an adverse possession question and resolve it by utilizing the optional law framework developed by Ayres. My argument is that the allocation of initial options matters at least as much as the allocation of initial entitlements and that options should be granted to parties that have the best information to make decisions, which in the small-property case, are the numerous individual owners rather than the government. I find that in an effort to grandfather-in existing small properties and deter further development of small properties, the Shenzhen Municipal Government in the last two decades has adopted land use policies that can be neatly categorized into the five rules of legal entitlements under the optional law framework. The only missing rule, Rule 5, also provides a solution to a certain type of cases. Click here to download the chapter from SSRN.