This paper examines the impact of institutions on evolution of tourism accommodation format in Wulingyuan, a well-known tourist destination in China, from the perspective of institutional cluster embeddedness. Data were primarily collected through interviews and participant observations. The findings show a five-stage evolution process starting from introduction (1982–1988), through growth (1989–2000), adjustment (2001–2004), and upgrade (2005–2010) to the current stage of individualization (2011–present). During the process, the informal institutions work to suppress, conflict with the formal institutions, yet transform into formal institutions in the end. In such a process, institutional loopholes and frictions are the norm, and tourism accommodation format evolves from extensive development to sustainable development. It suggests that the sustainable development of the tourism accommodation industry needs the synergy of formal and informal institutions.