This paper explores the impact of the institutional arrangement of legalizing land transfer on land quality by utilizing unique county-level soil erosion data in China. The empirical results show that legalizing land transfer significantly reduces soil erosion. To date, the effect of land transfer on improving soil quality and the consequent positive spillover effect on the natural environment have been largely overlooked in existing literature and policy-making. Mechanism analysis indicates that under this institutional arrangement, agricultural investments that can improve soil quality have increased significantly. Such investments tend to have economies of scale, and land concentration precisely makes them more economically feasible. Finally, the study finds that the improvement of land quality is unevenly distributed across regions with different socioeconomic backgrounds. Future land law reforms may need to further consider the potential impact of institutional arrangements on the distribution of soil quality.