Global Public Goods, Inequality and Institutional Change.
Understanding the effect of demographic trends and labour
market institutions on the demand for public environmental
protection.
Elisabetta Magnani
School of Economics
The Australian School of Business at UNSW
Sydney, Australia
Acknowledgements
I wish to thank Samuel Bowles, Maurizio Franzini and Stefano Zamagni for helpful comments to
previous versions of this paper. Research Assistance by Adeline Tubb is gratefully acknowledged.
Please send your comments to e.magnani@unsw.edu.au
The beginning: problems with the concept of
Sustainable Development
•
The concept of sustainable development: ability to "preserve the welfare
capacity of those who come after us" (Brundtland Report, 1987). The loss
of environmental quality will decrease welfare of the next generation.
This welfare loss will require suitable material and immaterial
compensations to increase welfare.
• If environmental damage increase with GDP, this argument sets a very
dangerous and potentially endless vicious circle. If the extra production of
goods and services further reduces the quality of environmental
amenities, more and more goods and services will be necessary to fulfill
the notion of sustainable development.
• It is exactly the link between economic growth and environmental
quality that poses a serious challenge to the established idea of
"sustainability“.
Contribution of this paper
• It is exactly the link between economic growth and environmental
quality that poses a serious challenge to the established idea of
"sustainability“.
• The emergence of a virtuous link between these two dimensions of
economic performance is conditional on the diffusion of public willingness
to pay for environmental care.
• The effect of inequality on environmental sustainability depends critically
on the institutional setting that structures interactions among agents.
• Shaping institutional settings requires embracing the idea of prospective
volition (Bromley, 2006a)
• Drawing upon a number of experimental and behavioural results, this
paper outlines a few research questions, which, if addressed, will
(hopefully) contribute to a wider debate over which LM institutions are
best suited to ensure a global economy that embraces the value of
intergenerational solidarity.
Too much emphasis on Prisoner’s Dilemma situations?
The role of institutions
• The literature has widely explored the Prisoner Dilemma problem arising
in the face of summation technology of public supply aggregation, the
ones where the resulting level of GPG provided depends on the sum of
individual offers. One important contribution (e.g., Sandler, 1998) is that
non-summation technologies do not necessarily imply Prisoner's
Dilemmas where the dominant strategy is "do nothing".
• Thus, a way to address the debate on institutional change for successful
management of current challenges vis-a-vis GPG is to consider which
institutional framework better creates the necessary conditions for public
and political support for environmental protection initiatives even if these
initiatives are not fully coordinated at the global level. In other words,
can we design institutions that support individuals' willingness to pay for
environmental quality?
Environmental quality: the result of individual choices
as well as collective choices. What shapes preferences of
environmental quality?
• Two major strands of literature on the Environmental Kuznets Curve
(EKC), can be distinguished on the basis of the channel through which the
downward sloping segment of an EKC may emerge (Egli and Steger,
2004)).
• The first class of models stresses shifts in the use of production technologies
(e.g., Stokey (1998); Smulders and Bretschger (2000).
• The second class of EKC models focuses on abatement expenditure, which
captures the fact that pollution can be alleviated by devoting public
resources to improve environmental quality (e.g., Selden and Song (1994);
Chimeli and Braden (2002); John and Pecchenino (1994).
• All these theoretical developments emphasize the importance of one or
both of these factors, namely individual behaviors (e.g., in choosing
production technologies, in adopting environment-friendly consumption
patterns), and collective decisions (for example policy choices), for the
emergence of paths of sustainable development.
What is the intentionality behind labour market
Institutional changes?
•
•
•
•
•
•
The new institutional economics places institutions at the centre of understanding
economies because "they are the incentive structure of economies" (North,
2005,p. vii).
Importantly, North fails to grasp the idea that institutions are not only
constraining factors, but rather "means whereby going concerns -family, firms,
villages, nation states regularize and channel individual action and interaction"
(Bromley, 2006b).
For North the key to understanding the process of economic change is the
intentionality of the players enacting institutional change.
From here the question: What is the intentionality behind Labour Market
Institutional changes?
The "new institutional" economics evaluates institutions and institutional change
only on the basis of their effect on economic "progress" as measured by
productivity or GDP growth.
Is this the only intentionality we can come out with as a global community?
What does LM Institutional Change entail?
•
Institutions as in Bromley (2006b): “opportunities to define choice sets -field of
action- for members of a political entity“. Are benefit and costs of LM
institutional change fully understood?
BENEFITS: Change towards a more limited role of protective LM institutions to access
productivity gains.
Protective LM institutions are blamed to cause high unemployment and low
economic growth. Howell et al., (2007) among many others conclude their
critical review of the literature on labour market transitions and institutional
change by stressing that there is scanty support to such view.
COSTS: LM institutional change involves increasing risk and uncertainty.
(i)
Overall earnings inequality has risen in all major world economies including
the US, the UK, and Japan (Acemoglu, 2003).
(ii)
Inequality has risen also in regard to wage and non-wage compensation, and
workplace disamenities.
(iii)
A sharp rise in within-group earning inequality implies increasing uncertainty.
Note that this uncertainty is not insurable because we do not know what skill
is.
What are the effects of an increasing LM uncertainty upon the
provision of GPGs?
• How do LM Uncertainty and Risk impact upon the adoption
of environmental friendly technologies?
• According to Sinn (1995) and Bird (1998), there is a risk-taking effect of
social safety nets.
• Abundant evidence is provided to support the view that inefficiency in
production choices arises following a lack of insurance (e.g., Dercon and
Christiaensen (2007), Baerenklau (2005); Engler-Palma and Hoag
(2007))
• Experimental economics has yielded an important set of
contributions relating uncertainty/risk and the provision of
GPG. Brown and Stewart (1999) find that the threat of
incurring an undesired outcome (losing money) does not
result in individuals overcoming the social dilemma.
Importantly, people identified as risk seekers increased their
level of cooperation in order to avoid losses, but these effects
were offset via reductions in internalization rates by risk
averse subjects.
How does LM Inequality
shape collective preferences for GPG?
•
What is the impact of rising inequality on individuals' incentives to cooperate for
the collective provision of GPG?
• The same institutions responsible for LM rigidity are also relatively successful in
achieving economic equality.
• One possible channel through which LM institutions can have spillover effects on
the provision of GPG is via the link between inequality and social cohesion (and
social capital).
(i) For example, Caramuta (2005) illustrates the dynamics relating inequality, social
capital and institutions. Multiple equilibria arise: one equilibrium features a high
level of social capital, low inequality and institutions that favor social equality.
(ii) In standard public goods experiments individuals face social
dilemmas given the presence of various kinds of uncertainty. Wit
and Wilke (1998) examine the effects of Environmental
Uncertainty (low, high uncertainty about the provision point) and
Social Uncertainty (low, high uncertainty about others'
cooperation) in a public goods dilemma. It was predicted and
found that Environmental Uncertainty decreases cooperation only
under High Social Uncertainty, but not under Low Social
Uncertainty.
Summary
• In recent years, there has been a huge increase in interest in the environment and
its interaction with the economy.
• A key feature of this literature is its recognition of the interdependence between
the economy and the environment. In general, this interdependence operates in
both directions and it is poorly understood.
• A rather overlooked issue is how economic institutions affect our ability and
willingness to provide GPG such as environment quality.
• In addressing Bromley's question "How do we wish the future to unfold for us?", this
paper develops an argument according to which future research will need to devote
resources to understanding the spillovers between institutional settings and
incentives to provide global public goods.
• I focus on labour market institutions as labour markets are traditionally the
"environment" in which inequality is created and perpetuated at the local and
global levels.
• Findings from experimental and Behavioural Economics stress that LM institutional
design, via its impact on risk and uncertainty, may have sizeable implications on the
provision of environmental care.