An institutional change from the communal system to the household responsibility system in rural chaina has brought a bout dramatic increase in productivity during the period of 1978-1985,but has also opend up a set of new problems decreased investment among others. I argue in this paper that the new responsibility system is effective to peasants by rendering residual claims but not so in internalizing positive externalities of investment resulting in the underinvestment . Agricultural subsidy investment tax credit the roles of such institutions as township and village enterprises in undertaking the investment in agricultural infrastructure and most fundamentally well-established property rights are discussed as possible remedies.