Chapter 4

Brief Overview on Tools for Institutional Analysis
1. The Multilevel institutional analysis Framework
2. The Institutional Analysis and Development (IAD)
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
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
Based on …
• What is property?
• What are rights?
• What is a property
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
• 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
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
• 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
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
• Individuals have only rights to priority of use, which can be
maintained for a long period, and have no right to exclude other
• 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
• 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
• 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
1. What is the major shortcoming of the
Field’s theoretical model to explain the
change in property right regime? Explain in
2. Explain the efficiency and equity views on
the change of property right?