Different layers are vertically chained，but horizontallythere is no linkage.This is one reason why units within the same layer compete against one another，and because economic power rests mainly in the xians，at that layercompetition is the most intense.Adding fuel to the fire,the delineation of rights applies everywhere.The geo-graphic boundaries defining a xian are clear，and therights and responsibilities of xian officials are assignedin such a way and with such clarity that there is no ques-tion that xians are effectively business firms of the firstorder.Business firms of the same nature compete，and this is another reason for the intense competition amongxians.
Still adding more fuel to the fire，xian officials arerewarded according to performance.No doubt politick-ing and corruption are present，but these activities，too,can be expected in large corporations in advanced mar-ket economies.Other than the formula of awardsdescribed earlier，xian officials are entitled to businessexpenses rather generously，depending on how much money the xian makes.Each individual is allowed tobuy one living quarter at construction cost，and is subjectto promotion based on performance.There is a ‘56-year-old hypothesis’ in circulation: With salaries so lowandawards inadequate in some xians，and with the retirementage being 60，by the age of 56 officials not havingenough savings are inclined to be corrupt.Some offi-cials，however，told me that competent individuals are on demand from outside businesses，because managing a xian is in fact managing a business.
The adoption of value-added taxation in 1994 wasanother addition of fuel to the fire.In essence，it is sharecropping.As noted in my early work，under share-cropping the landlord cares a lot more about the perfor-mance of tenants than when there is a fixed rent，becausehis income depends on tenant performance.38 A vividexample to illustrate the intensity of competition amongthe xians is that of shopping malls.A xian may beviewed as a large shopping center，under the umbrella ofone corporation.Tenants renting shop spaces in the cen-ter are the equivalent of investors in a xian.The tenantpays a fixed minimumrent（the equivalent of an investorpaying a fixed land price），a share rent on top（the equiv-alent of value-added tax），and we all know the shoppingcenter owner is careful in selecting tenants and tries toaccommodate tenants in many ways because of sharecontracting.And，like shopping centers offering specialdeals to anchor stores，xians offer special deals toinvestors who they consider to be big draws.If a wholecountry is filled with such shopping centers，doing simi-lar business but with the entities being separate，theintensity of competition among themwould be verystrong indeed.
【38】Cheung，The Theory of Share Tenancy,op.cit.pp.72-79.
The xian systemdoes more to encourage competition than the hypothetical shopping centers.Xians are heldresponsible to the layers above.Thus these upper layersnot only encourage competition——they enforce it! Afterall，the upper layers are entitled to a 75% cut of value-added tax.It is here the layer-by-layer responsibilityarrangement intensifies competition among xians.
Let us return to the nature of the responsibility systemto comprehend better the intense competition amongxians.During the evolution of that system，the delin-eation of use rights，and hence private property rights，is woven into market contracts.As the Coase Theoremimplies，the use of the market is in two steps.The first is the delineation of private property rights，which in myviewis itself a contract restraining competition for scarce resources.The second step comes with the mar-ket proper，where the rights to use resources or to the outputs produced are exchanged under the form of price-bearing contracts.
The responsibility systemrests on a different arrange-ment.It combines the delineation of private use rightsand market transactions into one contract.An investor ina xian often signs a contract only several pages long,stating land size，location and price，what he can do andwhat he must do，and by what time various duties must be discharged on both sides.The deed to the land，how-ever，will not be issued until some months after money from the investor is lodged in a local bank.This signedmarket contract is transferable，but for future sale of theland or for mortgage purposes，the land deed issued laterhelps a great deal.
The question in my viewis why the weaving ofproperty rights into a market contract is so significantin encouraging competition，as compared to the two-stage process envisaged under the Coase Theorem.The answer is that with the weaving-in arrangementthe investor is obliged to perform.Other than payingmoney，the investor has to discharge the contractualstipulations to secure the right to use the land.Inother words，price aside，responsibility contracts aremeant to be awarded to deserving winners.Errors injudgment of course occur，and investors playing tricksare not unusual，as some may just build a fence aroundthe property and do nothing more.When land pricesare falling xian officials may look sideways，but whenthe economy picks up they will move to reclaimtheproperty per contractual stipulations.There was plen-ty of screaming frominvestors around 2000，when sharply-fallen land prices began to turn around.However，investors who performed as stipulated wereall smiling.
