A major dilemma in homestead governance under urbanization is the continual expansion of homestead areas and the frequently emerging problem of “one household having multiple homesteads and exceeding the standard area”. Clarifying the logic of this dilemma will help improve the reform of the homestead system and is of great significance to promote rural vitalization and integrated urban-rural development.

This paper utilizes empirical evidence from the China Rural Household Panel Survey (CRHPS) to explain this dilemma from a land expropriation perspective. The study reveals that urbanization-induced land expropriation results in appreciation of suburban land, both households and the government engage in the distribution of land income rights in a non-market way, and in pursuit of higher returns, households expand their homestead areas. Mechanism testing indicates that economic incentives and institutional vacuum play a regulatory role in affecting household behavior. When land appreciation is greater and there are stronger social networks among households, the impact of urbanization on the expansion of rural homestead areas becomes more pronounced. Heterogeneity analysis shows that stricter homestead policies will compress the institutional vacuum for household behavior and mitigate the impact of urbanization on homestead expansion.

The marginal contributions of this paper are as follows: (1) It shows that homestead governance is no longer regarded as an issue purely relating to “Agriculture, Rural Areas, and Farmers”, but rather a reflection of the interaction between the city and the countryside, as well as between the government and farmers. (2) It explores the impact of urbanization on the expansion of rural homestead areas from two angles: economic incentives and institutional vacuum. (3) It proposes policy approaches to address the dilemma in homestead governance. Subsequent policies should focus on two aspects: recognizing regional variations in economic incentives and implementing differentiated policies; refining formal institutions and minimizing specific administrative actions, so as to compress the institutional vacuum for farmers to expand homestead areas.