Y Qian et al./ European Economic Review 43(1999)1085-1094 1093 of the reform blueprint. On the other hand, experimentation can save on setup costs because of the option value of early reform reversal in case of a bad blueprint(Dewatripont and Roland, 1995) There is thus a trade-off between the 'gradual approach(M1=Iml-Cml) ind the big bang approach. The former has lower expected gross benefits from hange but also lower expected costs of implementation. In Qian et al. (1997)we show that if p is low enough, that is, program uncertainty is important enough or if C is high enough, then the gradual and experimental approach dominates M1>M2. Indeed, in that case, the option value of early reversal after having tried a bad blueprint increases Let us note immediately that the U-form does not benefit from the gradua pproach. Indeed, the option value of early reversal will be absent since, whether one implements partial reform or full reform, the same setup costs will have to be incurred at the center. On the other hand, expected benefits cannot be higher but only lower. In fact, due to complementarities in reform, attribute matching may be an impossible task. To come back to the example of enterprise reform, it is hard to see how it is possible to implement layoffs without introducing a social safety net, while still preserving social peace It now remains to compare M, with U2. The flexibility of the former is an advantage over the latter. One can show that when i is close enough to 1 U2>max(M1, M2). This is because of the U-form's advantage in economies of scale. On the other hand, if i is small and C is large, then M, will dominate both 4. Application to China In the following, we provide some examples from China's transition from plan to market to show the role of regional experimentation in pursuing reforms in China A major feature of the successfully implemented Chinese agricultural reform is its trial-and-error or experimental approach. The experiments started in some counties in 1978 when the rest of the Chinese rural areas were operating under the collective farming system. A famous experiment started in Fengyang county of Anhui province where the households in a village began to contract with the local government for delivering a fixed quota of grain in exchange for farming on a household basis. The practice was later imitated by other regions and also promoted by the central government. By 1984, almost all farm household across China had adopted this method Another example is that of the Special Economic Zones. In 1980, China formally established four "Special Economic Zones, Shenzhen, Zhuhai, Shan- tou, and Xiamen. The M-form structure made the local governments in Special Economic Zones capable of coordinating activities across all the industriesof the reform blueprint. On the other hand, experimentation can save on setup costs because of the option value of early reform reversal in case of a bad blueprint (Dewatripont and Roland, 1995). There is thus a trade-o! between the &gradual approach' (M1 "n .1 !c .1 ) and the &big bang' approach. The former has lower expected gross bene"ts from change but also lower expected costs of implementation. In Qian et al. (1997) we show that if p is low enough, that is, program uncertainty is important enough, or if C is high enough, then the gradual and experimental approach dominates: M1 'M2 . Indeed, in that case, the option value of early reversal after having tried a bad blueprint increases. Let us note immediately that the U-form does not bene"t from the &gradual approach'. Indeed, the option value of early reversal will be absent since, whether one implements partial reform or full reform, the same setup costs will have to be incurred at the center. On the other hand, expected bene"ts cannot be higher but only lower. In fact, due to complementarities in reform, attribute matching may be an impossible task. To come back to the example of enterprise reform, it is hard to see how it is possible to implement layo!s without introducing a social safety net, while still preserving social peace. It now remains to compare M1 with ;2 . The #exibility of the former is an advantage over the latter. One can show that when j is close enough to 1, ;2 'maxMM1 , M2 N. This is because of the U-form's advantage in economies of scale. On the other hand, if j is small and C is large, then M1 will dominate both M2 and ;2 . 4. Application to China In the following, we provide some examples from China's transition from plan to market to show the role of regional experimentation in pursuing reforms in China. A major feature of the successfully implemented Chinese agricultural reform is its trial-and-error or experimental approach. The experiments started in some counties in 1978 when the rest of the Chinese rural areas were operating under the collective farming system. A famous experiment started in Fengyang county of Anhui province where the households in a village began to contract with the local government for delivering a "xed quota of grain in exchange for farming on a household basis. The practice was later imitated by other regions and also promoted by the central government. By 1984, almost all farm households across China had adopted this method. Another example is that of the Special Economic Zones. In 1980, China formally established four &Special Economic Zones', Shenzhen, Zhuhai, Shan￾tou, and Xiamen. The M-form structure made the local governments in Special Economic Zones capable of coordinating activities across all the industries Y. Qian et al. / European Economic Review 43 (1999) 1085}1094 1093