Brief Overview on Tools for Institutional Analysis 1. The Multilevel institutional analysis Framework 2. The Institutional Analysis and Development (IAD) Framework 3. Institution of Sustainability (IoS) Framework 4. Game-theory and the Nash Equilibrium as a tools for institutional analysis Analysis of strategies and Equilibrium • Each player builds expectations about the behavior of the other player and assigns probabilities p and 1-p to the strategies of the other player, max U = ((p).(AiBi)+ ((1-p).(AiBj)), ((p).(AjBi))+ ((1-p).(AjBj)) • Each player choose the strategy that maximizes her/his utility , max U (AiBi, AiBj, AjBi,AjBj) • Example: A:UAi((p*3)+(1-p)*2)) -> Strategy I A:UAj((p*4)+(1-p)*1))-> Strategy J B:UBi((p*3)+(1-p)*2)) ->Strategy I B:UBj((p*4)+(1-p)*1)) -> Strategy J Institution and Enforcement We have two types of sanctions 1) Collective Sanction 2) Individual Sanction Individual Sanction Property Right: Theories and Practice Workineh Eshetu Objective the Chapter: •By the end of this chapter, students will be able to explain the theories of property rights and how property rights influence economic activities. Based on … • What is property? • What are rights? • What is a property right? The Concept of Property Rights • Many people regard property as a tangible “physical object”. • Institutional economists use a different conceptual language. • Property is considered as “a benefit (or income) stream” in that the owner controls this benefit stream (Bromley 1991). • A right may be a set of actions and behaviors that possessor of a property may not be prevented from undertaking (right), or a duty on all others to refrain from preventing those actions or behaviors (duty). • Therefore, property rights are not relationships between the right holder and an object, but rather are relations between the right holder and other people with respect to the object (Bromley 1991:15). Alternative definitions 1. Property right is defined as “the capacity to call upon the collective to stand behind one’s claim to benefit stream” from an asset of economic importance (Bromley 1991:15). 2. “Property rights over assets consists of the rights or the powers, to consume, obtain income from and alienate these assets” Barzel (1989:2). • With respect to right holders there are at least two distinct dimensions on which property rights may differ: 1. The degree of control Understanding PR based on the degree of control over resources is related to the so called bundles of rights 2). The type of the right holders • Understanding PR based on the type of right holders is related to the so called property right regimes. 1). Bundles (Package) of rights 1. Access: The right to enter a defined physical area and enjoy non subtractive benefits (for example, hike, sit in the sun). 2. Withdrawal: The right to obtain resource units or products of a resource system (for example, catch fish, divert water). 3. Management: The right to regulate internal use patterns and transform the resource by making improvements. 4. Exclusion: The right to determine who will have access rights and withdrawal rights, and how those rights may be transferred. 5. Alienation: The right to sell or lease management and exclusion rights (Schlager and Ostrom, 1992). • Third-party enforcements may emanate from several authorities: international, state, traditional, religious institutions, project authorities • The strength of each authority to enforce rights may vary spatially and/or temporally. • In some cases, a single authority is strong to enforce rights • In some other cases, multiple authorities exist to enforce rights: the case of Legal Pluralism • In some cases, no authority exist to enforce claims: the case of open access 2). Property Right regimes (Ownership) • Property Right regimes define the role of different actors in relation to a resource system (Bromley 1992). • PRR are broadly classified as 1. State property, 2. Common property, 3. Private property and 4. Open access or no-property regimes (Bromley 1991). • A property right regime derives its meaning from the structure of rights that characterizes the relationship of individuals or groups to another, and to the resources. 1) Private property: •Individuals command over a specified resource. •The right-holders enjoy both the right to use and the right to regulate resources. •However, there is no absolute autonomy for private property right-holders. •There are restrictions usually coming from the state 2) Common Property: • Common Property is OWNED BY BY a group of co-owners. • The users are abide by common rules in relation to the specified resource • Individuals have only rights to priority of use, which can be maintained for a long period, and have no right to exclude other members • One important feature of common property resource (CPR) is that the decisions of individuals affect the whole group and vice versa • This is the collective feature of CPR. 3) State Property: • The state retains direct control of the benefits derived from a resource by determining access and use rules for individuals (Bromely, 1989, 1991). • Typical examples are game reserves and large state forests • In a more relaxed case of state property, individuals and groups may have use rights • There are diverse arrangements. • For example, land belongs to the state in many developing countries while agriculturalists and other stakeholders have only use rights 4) open access: • When resources are owned by no one or are used by all without any restriction, they are called open access resources • Such lack of property regime leads to resource destruction and increases behavioral uncertainty • This is often termed as “tragedy of open access” or formerly coined as “ the tragedy of the commons” (G. Hardin 1968) NO Wholesale Recommendation (NO one type fit all policy) • There is no single property right regime that fits to every corner of the world or resource system. • Rather, different property right regimes work well under different circumstances and hence wholesale recommendation cannot be made in favor of any kind of regime (Bromley 1992). • Bromley (1991: 143) provides a graphical illustration for the appropriateness of different property right regimes in different locations • He used administrative costs and the value of the resource (or object for that matter) to coin his arguments Class Discussion Question • Provide real examples for each piece of right in the bundles of property right and discuss among your selves • Suggest any modification to such type property right arrangement (if any) • Do you know a situation of legal pluralism? Share information among yourselves and discuss the advantages and disadvantages of such arrangements? Forces of change in property rights 1) Equity versus efficiency views 1. The Equity (distribution) view: recognizes that the forces of change in property rights are the inherent dissatisfactions by certain groups or individuals from the existing property rights structure. In such contexts, change is determined by the capacity of actors to “contract” for property rights change or persistence of existing ones (Libecap1989). 2. The efficiency view: • Property rights change results from opening of New markets, Change in relative prices of factors of production, Demographic shift and Technological innovation. • Change in these factors in an economy creates a pressure for change in property rights (Demsetz1967; Boserup1965; North 1981; Bromley 1991; Ensminger1997). • They argue that efficiency of land use increases when property rights change from a purely open access (no property rights) to common and then to private due to population growth and resource scarcity leading to more < < commercialization. Use of Land under Open access common property Private Property • Though transaction costs of enforcing rights are increasing at each stage, the return from improved efficiency largely outweighs the costs (Bromley 1991) 2) The “cost-benefit” versus “scarcityincursion” analysis a) Cost-benefit argument • Property rights emerge when the benefits obtained from controlling access to resources exceed the transaction costs of defending the resource from others, i.e. the “social cost-benefit” comparisons or “Internalization of Externalities” from introducing new property rights. • Gains from internalization of externalities must exceed the costs to cause alteration of property rights regime. Those economic forces fetching new opportunities (e.g. emergence of markets or newly introduced technology) should ensure cost-effective way of internalizing external effects (Demsetz1967) (e.g. controlling of hunting areas as a result of the rise of for industry) b) The scarcity-incursion analysis (Field’s theoretical model) • This is a counterargument challenging Demsetz‟s view and his proponents.(Counterargument for efficiency views) • An increase in resource value would rather lead to less exclusive property rights since the more valuable resource will attract greater incursion (Field, 1989). • According to Field, a higher resource value will cause pressure from outsiders intending to use the resource. • This will cause the exclusion cost to rise much more than the benefits obtained from excluding others. • Cost protection > Benefit from excluding other • An increase in the number of these commons (from a single large commons to completely divided parcels for individuals N) will lead to a decline in the marginal governance cost (Tm) because of reduced cost in organizing collective action. • However, such an increase in the number of commons will lead to a rise in the marginal cost of exclusion (Em) • A point where “Tm” and “Em” intersect (M*), one may find an optimal number of parcels for the commons and size of users. • An increase in resource value (EmR), an introduction of new technology of exclusion (EmT), and increase in population (Tmp) will again affect the optimality, where both having the opposite effect, but again maintaining the optimal point. • Taking account of Field’s theoretical model requires caution 1. We have to consider the production method and how land is used (grazing or cultivation) since both aspects could affect the exclusion and governance costs (Smith). 2. The validity of Field’s model demands the fulfillment of certain preconditions jointly (simultaneously). •Thank you Quiz 1. What is the major shortcoming of the Field’s theoretical model to explain the change in property right regime? Explain in detail 2. Explain the efficiency and equity views on the change of property right?