More on Ostrom and Williamson, and decentralized coordination

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.

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