For decades, the Chinese government has been concerned about its ability to meet the grain self-sufficiency goal due to the depletion of cultivated land caused by urbanization and industrialization. The Dynamic Balance Policy (DBP) was initiated in 1998 to balance China's need to protect cultivated land with the need to provide land for urban and industrial development. The DBP is a "no net loss" policy which requires local government to keep their good-quality cultivated land at the current level. If cultivated land is converted to other uses, an equal amount of other land, adjusted for the quality, must be converted to cultivation to compensate for the loss.

Empirical evidence suggests that the DBP has had no effects of reducing cultivated land loss in China. Economic incentives, such as the values of urban and cultivated land, emerge as the most influential factors for China's land use changes. Moreover, these economic incentives may have overridden the effects of the DBP, if any. Polices can be made more effective to address the windfall profits in land acquisition and conveyance, and offer economic incentives for not converting cultivated land to urban uses.

This dissertation conducts a systematic examination of the effects of the DBP of curbing the rate of cultivated land conversion. In particular, it develops a theoretical model of land conversion that combines the institutional structure of land use in China and the incentive structure of Chinese local officials whose goal is to promote local economies and budgetary balances. This model serves as the theoretical foundation for the empirical examination. The empirical implementation of the land conversion model uses the official land use data provided by the Ministry of Land and Resources of China and economic data published in various issues of provincial statistical yearbooks. This is a unique set of data which combines China's official land use data and economic data at the prefecture level and covers a period of rapid economic growth and prominent changes in land uses from 1996 to 2004.