Property Rights and Collective Action in
Natural Resources with Application to Mexico
Lecture 1: Introduction to the political economy of natural resources
Lecture 2: Theories of collective action, cooperation, and common property
Lecture 3: Principal-agent analysis and institutional organization
Lecture 4: Incomplete contracts with application to Mexico
Lecture 5: A political economy model
Lecture 6: Power and the distribution of benefits with application to Mexico
Lecture 7: Problems with empirical measurement with application to Mexico
Lecture 8: Beyond economics: An interdisciplinary perspective
Common Property Resources
•Not excludable
– If
access is open, anyone can use them.
•Rival goods
– One
person’s use reduces other’s use.
The Tragedy of the Commons
•Garrett Hardin, “The Tragedy of the Commons” (Science, 1968)
•Example of common pastureland, open to all. The rational herdsman seeking
to maximize gain will calculate the utility to him of adding one additional animal,
not taking into account the effect of his use on other herdmen.
•Thus, each is compelled to add as many animals as possible, leading to overgrazing.
– “Freedom in a commons brings ruin to all.”
•Other examples of commons:
– Fisheries
– Free parking meters
– Admission to national parks
•Thus, laissez-faire, “Invisible Hand” approaches to
resource allocation need not always provide
the expected optimal solution.
Community Common Property
Resources
•
The word community is used in many ways:
1. Ecological communities in an ecosystem
2. Community with defined membership and constitution
3. Sense of community
4. Communities of interest
5. Communities of space
6. Community forestry
•
In this workshop we will use (2): community as a group of
people distinguished by a collective property right.
•
However, configurations of access and control of property are central:
• Who owns it?
• Who claims it?
• Who makes decisions about it, and how?
• Who benefits and incurs cost from it?
Owens Valley: Evolved Community
of Interests
•In 1900, Los Angeles was doubling in population every five
years, and was running out of water, so Mulholland bought
water rights from rural ranchers in Owens Valley to the North.
•The aqueduct to Los Angeles opened in 1913; by 1926 Owens Lake
had disappeared. Mono Lake water levels fell.
•Massive dust storms result as the valley dries up.
•Lawsuits brought by rural towns and local environmentalists in the
1980s force Los Angeles to divert some water to the lakes,
to raise water levels and reduce toxic dust.
•Current status: community of interests control
Owens Valley lakes.
•A story of devolution. The solution
was not governmental, but a local
community acting to preserve
common property resources.
Owens Lake today
Imperial Valley: Nonevolved
Community of Interests
•Water from the Colorado River irrigates the Imperial Valley
and the inland Salton Sea. In 2003, the amount of water
was cut by 11%, while Valley farmers negotiated with
San Diego to sell water to the city for $50 million annually.
•Salinity in the Salton Sea increases, killing wildlife and
threatening to make a “dead” lake.
•Estimates of the environmental cost of
repairing the lake reach $1 billion.
•No devolution, no community of interest
Salton Sea
Groundwater in Los Angeles:
Initially commons, evolves to self governance (bottom-up)
•Legally, the right to pump from groundwater basins was established by a history
of continuous withdrawal and beneficial use.
•“Rule of capture” governs ownership of the stock, when property rights are
undefined and access nonexclusive.
– Pumpers are granted exclusive rights to what they pump; what they do not
pump will be taken (in part) by rivals.
– The result was pumping far beyond sustainable levels, with saltwater incursion
and threatened collapse of groundwater basins.
•Solution: In 1943, negotiations began to reduce pumping from Raymond Basin
– With the threat of lawsuits looming, stakeholders negotiated an agreement to
share the cutback to safe levels proportionately, rather than determine in
court whose rights took precedence.
– By negotiating their own agreement, the parties ended the pumping race faster
and at a lower cost, while gaining firm and marketable rights to defined
shares of the safe yield of the basin.
– Later litigation in nearby basins resulted in management costs 25 times higher.
Irrigation in Sri Lanka:
Initially commons, evolves to self governance (top-down)
•Maldistribution due to lack of collective action.
•Gal Oya irrigation system is the largest in Sri Lanka, completed in 1950
•The acreage actually irrigated turned out to be only one-third of projections
– Engineers presumed that water would be treated as a scare good with strict
allocation rules; neither presumption was appropriate.
•Incentive structure for rice farmers reinforced a short-term “individualistic” strategy
– Take as much water as their paddy fields will hold, legally or illegally, while refraining
from participation in any system that would limit water use.
•In 1980s, Agrarian Research and Training Institute organizes farmers into small-scale,
informal, grassroots organizations, to educate and
problem-solve.
•Under self-governance, water distribution becomes
more equitable.
Canal Belihul Oya, Sri Lanka
Fisheries: Commons
•In Sri Lanka, open access to ocean fisheries combined with
improved boats and nets has led to a precipitous decline
in stock.
•Fisherman have to go farther out to catch fish, increasing
their risk of death.
•The limit of entry is the risk of death.
•Attempts to set rules have been proposed but not
implemented, due to ongoing
civil war.
Sri Lankan fishing boats
Formal Definitions of Terms
•Coalition formation
•Participation constraints
•Incentive compatibility
•Alignment of incentives
•Mechanism design
•Property rights
Coalition Formation
•A subset of stakeholders whose interests are more closely
aligned with each other’s than with other stakeholders.
•Nash/Harsanyi model of bargaining and policy formation
Participation Constraints
•The point at which a player’s payoff for participation
is equal to their payoff in the disagreement
outcome.
•Unless this constraint is satisfied a person in the community
will not become a member of a coalition.
Incentive Compatibility
•An allocation mechanism for which participants in the
process would not find it advantageous to violate the
rules of the process.
•Any institution or rule designed to accomplish group
goals must be incentive compatible if it is to perform
as desired.
•If a mechanism is incentive compatible, then each agent
knows that his best strategy is to follow the rules according
to his true characteristic, no matter what the other agents do.
Alignment of Incentives
•Stakeholders share a common interest
•If there is a conflict of interest, there cannot be
alignment of incentives
Principal-Agent Problem
•Agent: an individual employed by a principal to achieve the
principal’s objective
•Principal: an individual who employs one or more agents to
achieve an objective
•Problem arises when agents (e.g., a firm’s managers) pursue
their own goals rather than the goals of the principals (e.g.,
the firm’s owners).
Mechanism Design
•Explicitly recognizes the possibility of institutional failure
•Asymmetric information:
– Moral hazard/Hidden action
– Hidden information
•Adverse selection
•Signaling
•Strategic Behavior and False Signals
The Analytical Dimensions of
Community Policy
Analytical frameworks for the study of community
policy typically focus on one of four dimensions:
1. Incidence
2. Implementation
3. Political Economy
4. Governance Structures
Incidence
•Uses partial equilibrium frameworks, based on a number of
simplifying assumptions:
•Markets are perfect in the absence of government
intervention; any introduction of policy is by
construction a government failure.
•Assumes:
– Perfect implementation (PI)
– No feedback effects from interest groups (NF)
– A given governance structure (GG)
Implementation
•Explicitly recognizes the possibility of institutional failure
•Does not presume perfect implementation (PI)
•Policy analyses that recognizes agents actively respond
to incentives.
•Asymmetric information:
– Moral hazard/Hidden action
– Hidden information
•Adverse selection
•Signaling
•Incentive compatibility
•Participation constraints
Political Economy
•The assumption of no feedback effects from interest
group formation (NF) is relaxed.
•Seeks to explain the selection and implementation of actual
public policies by endogenizing the instrument choice as a
function of the actions of stakeholders.
•Political economic theories include: University of Chicago,
rent-seeking, public choice, liberal-pluralist, “theory of the
state”, political-economic bargaining
•Empirical formulations: structural, constraints, policy reaction
functions, reduced form representations
•Political preference function (PPF)
Governance
•A constitutional analytical dimension, that relaxes the given
governance structure assumption (GG)
•A constitutional design establishes the rules by which rule are made,
setting the boundaries for economic, political and civil freedoms.
•Conceptual frameworks: views current policies as a rational outcome
of the collective decision-making process.
•If power is unevenly distributed among the special interests and societal
interests, organizational failures naturally arise.
•The resulting distribution of political power and influence creates a
tradeoff between public and special interest in the selection of
particular policies.
•Formal Determination:
– Bargaining Issues
– Stakeholder Access
– Admissible Coalitions
– Default Options
Constitutional Rules and
Policymaking Centers
•The major ideas that emerge in constitutional prescription
can be illustrated by means of a simple example of three
policymaking centers faced with a two-dimensional,
group-choice problem in which any one of four possible
constitutional rules may be selected.
•Even though this is a simplified example, it nevertheless
graphically captures the essential features of the
constitutional selection problem.
•The preferences of the individual policy centers among
the various policy combinations are represented by the
indifference curves drawn in Figure 9.1.
Preferences and collective choice for three
policymaking centers
Location of a Public Good from City
x2
U21
U22
U23
B
G
U20
U14
U13
E
U34
I
H
U12
F
U33
J
U32
U31
U11
A
U10
U24
U35
D
0
Investment Timing
C
U30
x1
Preferences and collective choice for three
policymaking centers, continued
•Points A, B, and C represent the policy combinations most favored
by policy center 1, 2, and 3, respectively; and the utility levels
associated with the various indifference curves satisfy the relation,
U i 0  U i1  U i 2 ...( i  1,2,3)
•As travel costs are borne by the consumers of the public goods,
policy centers 1 and 3, who happen to represent neighboring
consumer interests, prefer essentially the same site location.
•Policy center 1 is more impatient than policy center 2 who, in turn,
is more impatient than policy center 3.
•The policy center’s time preferences are revealed by their attitude
toward the timing of the government’s investment in the public
good.
•The more impatient the policy center, the sooner they prefer the
investment and associated financing take place.
Preferences and collective choice for three
policymaking centers, continued
•The lines, AB, AC, and BC, connecting the most favored
combinations are loci where the indifference curves of policy
center i and policy center j i, j  1,2,3 are tangential to each
other; i.e., they are the corresponding contract curves.
b
g
•Note that for any policy combination outside  , there is at
least one combination in  which is Pareto superior to it and
will, therefore, be unanimously preferred by all policy
centers.
Rules
•There is a large set of constitutional rules that could be evaluated—expert rule
(or almost expert rule), tie-breaking chairman rule, rule of the chairman and
two aids, unanimity, restricted simple majority rule, multiple majority rule,
simple majority rule.
•Assume that only four collective choice rules are admissible at the
constitutional phase. These rules are:
• r1 : Elect one policy center who will serve as the sole decision maker
on all policy issues (“president”).
• r2 : Conduct a referendum over pairs of policy alternatives where the
winner in each pair is decided by simple majority, and no bargaining
and/or coalition formation is permitted (“referendum”).
• r3 : Use the same procedure as under referendum, but bargaining and
coalition formation are allowed (“voting cum bargaining”).
• r4 : Select a policy combination with which all policy centers concur
(“unanimity”).
Evaluation of Alternative Constitutional Rules:
Presidential System
•Under a presidential system ( r1 ), there are three possible political
solutions: A, B, and C.
•The policy center’s expected utility is then
1
V ( r1 ) 
9
L
O
.
U ( A) U ( B) U (C )P
M
N
Q
3
3
i
i 1
3
i
i 1
i
i 1
Evaluation of Alternative Constitutional Rules:
Referendum
•If a referendum (r2 ) is selected, every point in is a likely
candidate for a solution since the path selected in the operation
phase cannot be foretold with certainty.
•The policy center’s expected utility is then
3
1
V ( r2 ) 

3S (  ) i 1
where
zz

U i ( x1 , x2 , ) dx1 dx2 ,
S () is the area of  .
Evaluation of Alternative Constitutional Rules:
Voting cum bargaining
•Under voting cum bargaining ( r3 ), the set of possible political
solutions depends on the solution concept employed.
•There are three possible solutions: policy combination D
corresponding to the coalition structure 1, 3 , 2 ; policy
combination E corresponding to coalition structure 1, 2 , 3 ;
policy combination F corresponding to coalition structure
2, 3 , 1 . Under this constitutional rule, the policy center’s
expected utility is
l ql q
1
V ( r3 ) 
9
l ql q
L
O
.
U ( D) U ( E ) U ( F )P
M
N
Q
3
3
i
i 1
3
i
i 1
i
i 1
Evaluation of Alternative Constitutional Rules:
Unanimity
•The political solution under unanimity (r4) is the outcome of a
bargaining game and depends again on the solution concept
employed.
•The policy center’s expected utility is then
1 3
V ( r4 )   U i ( J ).
3 i 1
Bargaining Costs
bg
•Let C rk denote the cost of reaching a decision (“decision cost”)
per policy center associated with the selection of constitutional
rule; then one expects C r1  C r2  C r3  C r4 .
•Note that C rk consists mostly of the negotiation cost but may
include other types of costs, such as losses due to calculation
errors.
• C r1 is the smallest since, under the presidential system
assumed here, collective decisions are made by a single person.
• C r4 is the greatest, since, under unanimity, each individual
enjoys a veto power.
• C r3 is greater than C r2 since r3 involves bargaining
while r2 does not.
bg
bg
bg
bg
bg bg bg bg
bg
Bargaining Costs, continued
•Even though the mean values of the political solutions under
alternative constitutional rules are similar, large differences exist
among the corresponding spreads.
•When Dk is small, a political solution maximizing the well-being
of policy centers in Dk at the expense of those not in Dk is easily
attained.
•When Dk is large, its policy centers’ preferences are more diverse
and the solution agreed upon by policy centers in Dk is less likely
to maximize their preferences at the expense of the policy centers
excluded from Dk .
Bargaining Costs, continued
•The disparity is greatest under the presidential system r1 and
smallest under the unanimity rule r4 , with the voting rules
( r2 and r3 ) occupying an intermediate position.
•The difference in the spreads of political outcomes associated
with the two voting rules derives from a completely different
source—the wide range of possible “decision paths” under
referendum r2 as compared to the limited and centrally-oriented
set of possible solutions under voting cum bargaining r3 .
•The general pattern of variation in the policy center’s utility level
under the alternative constitutional rules reflects the spread of the
policy combinations under these rules.
Bargaining Costs, continued
bg
bg
bg
bg
•Note that spread r1  spread r2  spread r3  spread r4 .
•Given the “mean preserving spread” argument implied by the
above observation, it follows that for sufficiently risk-averse policy
centers V r1  V r2  V r3  V r4 .
bg bg bg bg
Constitutional Space Prescription
•The scope for prescription at the constitutional phase may be
decided by alternative rules selected in accordance with the
sensitivity of the policy centers’ expected utility to the ultimate
decision and its associated cost.
•The sole decision-maker case, r1 , exhibits maximal spread but
minimal bargaining costs, and it is usually confined to matters of
less importance.
•To evaluate, define
M k  V (rk )  C (rk ) .
The structure of (C, V) over the constitutional
rules and policy issues spaces
V
M4
M3
Expected Utility
M2
M4
M3
M2
M1
M1
M1
M2
M3
M4
0
C
Decision Costs