Archive for October 12th, 2009

h1

Ostrom’s work lends insight on regulation

October 12, 2009

Lynne Kiesling

At the Wall Street Journal’s economics blog, Phil Izzo draws some insights from Elinor Ostrom’s work that complement my remarks in my previous post:

Ostrom’s work also has something to say about regulation: “The main lesson is that common property is often managed on the basis of rules and procedures that have evolved over long periods of time. As a result they are more adequate and subtle than outsiders — both politicians and social scientists — have tended to realize. Beyond showing that self-governance can be feasible and successful, Ostrom also elucidates the key features of successful governance. One instance is that active participation of users in creating and enforcing rules appears to be essential. Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctioning are the responsibility of the state and should be conducted by public employees.”

Posted in Economics | Tagged , , | 5 Comments »

h1

More on Ostrom and Williamson, and decentralized coordination

October 12, 2009

Lynne Kiesling

Both Ostrom’s work on governance institutions and common-pool resources and Williamson’s work on governance institutions and the transactional boundary of the firm contribute meaningfully to our understanding of how individuals coordinate their plans and actions in decentralized, complex systems. One of the most important ideas that Williamson has developed in his work is the role of adaptation in a world of necessarily incomplete contracting. In particular, the assumptions of a static environment with zero transaction costs eliminates a lot of the reasons why individuals need to contract, why firms with hierarchical organization can enhance welfare, and why governance structures like vertical integration exist. From Williamson (1971),

… the analysis of transaction costs is uninteresting under fully stationary conditions and that only when the need to make unprogrammed adaptations is introduced does the market versus internal organization issue become engaging.

Organizational form, and changes in organizational form as technology and transaction costs change, are important factors in how individuals can coordinate their actions for mutual benefit.

Ostrom’s work highlights the ability of communities of individuals, using their local knowledge and taking into account their individual preferences and constraints, to develop governance institutions that enable beneficial outcomes to emerge. As I put it in my book on institutional design in electricity,

Given the pervasiveness of incomplete property rights, even in commercial transactions, how are we able to engage in so much mutually beneficial exchange? We achieve it through the design of institutions to govern the commons (Ostrom 1990, 2005). These institutions can specify use rights, means for enforcing those use rights, and penalties for violating those rights. Again, defining and enforcing use rights is costly, but institutional design to do so happens when its benefits are high enough, and the institutional form varies depending on the environment and context.

The Ostrom works cited therein, Governing the Commons and Understanding Institutional Diversity, are full of rich insights that can be applied to environmental policy, regulation, economic development, and many other areas of economics and political science.

Posted in Economics | Tagged , , , | 9 Comments »

h1

Nobel: Ostrom and Williamson!

October 12, 2009

Lynne Kiesling

Hearty, heartfelt congratulations to Elinor Ostrom and Oliver Williamson for winning this year’s Economics Nobel! From the press release:

Economic transactions take place not only in markets, but also within firms, associations, households, and agencies. Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.

Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes.

Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson’s theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets.

Few other economists have influenced my thinking as much as Ostrom and Williamson. Congratulations!

UPDATE: I’ve written a lot about Ostrom’s work in the past, as has Mike; here are previous Knowledge Problem posts about Ostrom’s work, and previous Knowledge Problem posts about Williamson’s work.

Posted in Economics | 5 Comments »

Follow

Get every new post delivered to your Inbox.

Join 50 other followers