The emergence and eventual prevalence of the household responsibility system, which replaces the production team system as the unit of production and income distribution, has brought about dramatic changes in China's rural areas since 1979. This institutional change has resulted in remarkable growth in agricultural productivity.' However, in the literature on collective farms, a theory that is capable of explaining the causes and effects of this change is yet to be developed. The formal theory about collective economies developed so far by Ward, Domar, Sen, Oi and Clayton, Bradley, Maurice and Ferguson, Cameron, Bonin, Chinn, Israelsen, Putterman, and others suggests that the allocation of resources in a collective farm is efficient at least in