Land use change in rural China since the 1980s, induced by institution reforms, urbanization, industrialization and population increase, has received more attention. However, case studies on how institution reforms affect farmers’ livelihood strategies and drive land use change are scarce. By means of cropland plots investigations and interviews with farmers, this study examines livelihood strategy change and land use change in Danzam Village of Jinchuan County in the upper Dadu River watershed, eastern Tibetan Plateau, China. The results show that, during the collective system period, as surplus labor forces could not be transferred to the secondary and tertiary industries, they had to choose agricultural involution as their livelihood strategy, then the farmers had to produce more grains by land reclamation, increasing multiple cropping index, improving input of labor, fertilizer, pesticide and adopting advanced agricultural techniques. During the household responsibility system period, as labors being transferred to the secondary and tertiary industries, farmers chose livelihood diversification strategy. Therefore, labor input to grain planting was greatly reduced, which drove the transformation of grain to horticulture, vegetable or wasteland and decrease of multiple cropping index. This study provides a new insight into understanding linkages among institution reforms, livelihood strategy of smallholders and land use change in rural China.