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Property Rights and Collective Action in Natural Resources with Application to Mexico


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Title: Property Rights and Collective Action in Natural Resources with Application to Mexico

Property Rights and Collective Action in Natural
Resources with Application to Mexico
  • Lecture 1 Introduction to the political economy
    of natural resources
  • Lecture 2 Theories of collective action,
    cooperation, and common property
  • Lecture 3 Principal-agent analysis and
    institutional organization
  • Lecture 4 Incomplete contracts with application
    to Mexico
  • Lecture 5 A political economy model
  • Lecture 6 Power and the distribution of benefits
    with application to Mexico
  • Lecture 7 Problems with empirical measurement
    with application to Mexico
  • Lecture 8 Beyond economics An interdisciplinary

Common Property Resources
  • Not excludable
  • If access is open, anyone can use them.
  • Rival goods
  • One persons use reduces others use.

The Tragedy of the Commons
  • Garrett Hardin, The Tragedy of the Commons
    (Science, 1968)
  • Example of common pastureland, open to all. The
    rational herdsman seeking
  • to maximize gain will calculate the utility to
    him of adding one additional animal,
  • not taking into account the effect of his use on
    other herdmen.
  • Thus, each is compelled to add as many animals as
    possible, leading to overgrazing.
  • Freedom in a commons brings ruin to all.
  • Other examples of commons
  • Fisheries
  • Free parking meters
  • Admission to national parks
  • Thus, laissez-faire, Invisible Hand approaches
  • resource allocation need not always provide
  • the expected optimal solution.

Community Common Property Resources
  • The word community is used in many ways
  • Ecological communities in an ecosystem
  • Community with defined membership and
  • Sense of community
  • Communities of interest
  • Communities of space
  • Community forestry
  • In this workshop we will use (2) community as a
    group of
  • people distinguished by a collective property
  • However, configurations of access and control of
    property are central
  • Who owns it?
  • Who claims it?
  • Who makes decisions about it, and how?
  • Who benefits and incurs cost from it? 

Owens Valley Evolved Community of Interests
  • In 1900, Los Angeles was doubling in population
    every five
  • years, and was running out of water, so
    Mulholland bought
  • water rights from rural ranchers in Owens Valley
    to the North.
  • The aqueduct to Los Angeles opened in 1913 by
    1926 Owens Lake
  • had disappeared. Mono Lake water levels fell.
  • Massive dust storms result as the valley dries
  • Lawsuits brought by rural towns and local
    environmentalists in the
  • 1980s force Los Angeles to divert some water to
    the lakes,
  • to raise water levels and reduce toxic dust.
  • Current status community of interests control
  • Owens Valley lakes.
  • A story of devolution. The solution
  • was not governmental, but a local
  • community acting to preserve
  • common property resources.

Owens Lake today
Imperial Valley Nonevolved Community of Interests
  • Water from the Colorado River irrigates the
    Imperial Valley
  • and the inland Salton Sea. In 2003, the amount of
  • was cut by 11, while Valley farmers negotiated
  • San Diego to sell water to the city for 50
    million annually.
  • Salinity in the Salton Sea increases, killing
    wildlife and
  • threatening to make a dead lake.
  • Estimates of the environmental cost of
  • repairing the lake reach 1 billion.
  • No devolution, no community of interest

Salton Sea
Groundwater in Los Angeles Initially commons,
evolves to self governance (bottom-up)
  • Legally, the right to pump from groundwater
    basins was established by a history
  • of continuous withdrawal and beneficial use.
  • Rule of capture governs ownership of the stock,
    when property rights are
  • undefined and access nonexclusive.
  • Pumpers are granted exclusive rights to what
    they pump what they do not
  • pump will be taken (in part) by rivals.
  • The result was pumping far beyond sustainable
    levels, with saltwater incursion
  • and threatened collapse of groundwater basins.
  • Solution In 1943, negotiations began to reduce
    pumping from Raymond Basin
  • With the threat of lawsuits looming,
    stakeholders negotiated an agreement to
  • share the cutback to safe levels proportionately,
    rather than determine in
  • court whose rights took precedence.
  • By negotiating their own agreement, the parties
    ended the pumping race faster
  • and at a lower cost, while gaining firm and
    marketable rights to defined
  • shares of the safe yield of the basin.
  • Later litigation in nearby basins resulted in
    management costs 25 times higher.

Irrigation in Sri Lanka Initially commons,
evolves to self governance (top-down)
  • Maldistribution due to lack of collective action.
  • Gal Oya irrigation system is the largest in Sri
    Lanka, completed in 1950
  • The acreage actually irrigated turned out to be
    only one-third of projections
  • Engineers presumed that water would be treated
    as a scare good with strict
  • allocation rules neither presumption was
  • Incentive structure for rice farmers reinforced a
    short-term individualistic strategy
  • Take as much water as their paddy fields will
    hold, legally or illegally, while refraining
  • from participation in any system that would limit
    water use.
  • In 1980s, Agrarian Research and Training
    Institute organizes farmers into small-scale,
  • informal, grassroots organizations, to educate
  • problem-solve.
  • Under self-governance, water distribution becomes
  • more equitable.

Canal Belihul Oya, Sri Lanka
Fisheries Commons
  • In Sri Lanka, open access to ocean fisheries
    combined with
  • improved boats and nets has led to a precipitous
  • in stock.
  • Fisherman have to go farther out to catch fish,
  • their risk of death.
  • The limit of entry is the risk of death.
  • Attempts to set rules have been proposed but not
  • implemented, due to ongoing
  • civil war.

Sri Lankan fishing boats
Formal Definitions of Terms
  • Coalition formation
  • Participation constraints
  • Incentive compatibility
  • Alignment of incentives
  • Mechanism design
  • Property rights

Coalition Formation
  • A subset of stakeholders whose interests are more
  • aligned with each others than with other
  • Nash/Harsanyi model of bargaining and policy

Participation Constraints
  • The point at which a players payoff for
  • is equal to their payoff in the disagreement
  • outcome.
  • Unless this constraint is satisfied a person in
    the community
  • will not become a member of a coalition.

Incentive Compatibility
  • An allocation mechanism for which participants in
  • process would not find it advantageous to violate
  • rules of the process.
  • Any institution or rule designed to accomplish
  • goals must be incentive compatible if it is to
  • as desired.
  • If a mechanism is incentive compatible, then each
  • knows that his best strategy is to follow the
    rules according
  • to his true characteristic, no matter what the
    other agents do.

Alignment of Incentives
  • Stakeholders share a common interest
  • If there is a conflict of interest, there cannot
  • alignment of incentives

Principal-Agent Problem
  • Agent an individual employed by a principal to
    achieve the
  • principals objective
  • Principal an individual who employs one or more
    agents to
  • achieve an objective
  • Problem arises when agents (e.g., a firms
    managers) pursue
  • their own goals rather than the goals of the
    principals (e.g.,
  • the firms owners).

Mechanism Design
  • Explicitly recognizes the possibility of
    institutional failure
  • Asymmetric information
  • Moral hazard/Hidden action
  • Hidden information
  • Adverse selection
  • Signaling
  • Strategic Behavior and False Signals

The Analytical Dimensions of Community Policy
  • Analytical frameworks for the study of community
  • policy typically focus on one of four
  • Incidence
  • Implementation
  • Political Economy
  • Governance Structures

  • Uses partial equilibrium frameworks, based on a
    number of
  • simplifying assumptions
  • Markets are perfect in the absence of government
  • intervention any introduction of policy is by
  • construction a government failure.
  • Assumes
  • Perfect implementation (PI)
  • No feedback effects from interest groups (NF)
  • A given governance structure (GG)

  • Explicitly recognizes the possibility of
    institutional failure
  • Does not presume perfect implementation (PI)
  • Policy analyses that recognizes agents actively
  • to incentives.
  • Asymmetric information
  • Moral hazard/Hidden action
  • Hidden information
  • Adverse selection
  • Signaling
  • Incentive compatibility
  • Participation constraints

Political Economy
  • The assumption of no feedback effects from
  • group formation (NF) is relaxed.
  • Seeks to explain the selection and implementation
    of actual
  • public policies by endogenizing the instrument
    choice as a
  • function of the actions of stakeholders.
  • Political economic theories include University
    of Chicago,
  • rent-seeking, public choice, liberal-pluralist,
    theory of the
  • state, political-economic bargaining
  • Empirical formulations structural, constraints,
    policy reaction
  • functions, reduced form representations
  • Political preference function (PPF)

  • A constitutional analytical dimension, that
    relaxes the given
  • governance structure assumption (GG)
  • A constitutional design establishes the rules by
    which rule are made,
  • setting the boundaries for economic, political
    and civil freedoms.
  • Conceptual frameworks views current policies as
    a rational outcome
  • of the collective decision-making process.
  • If power is unevenly distributed among the
    special interests and societal
  • interests, organizational failures naturally
  • The resulting distribution of political power and
    influence creates a
  • tradeoff between public and special interest in
    the selection of particular policies.
  • Formal Determination
  • Bargaining Issues
  • Stakeholder Access
  • Admissible Coalitions
  • Default Options

Constitutional Rules and Policymaking Centers
  • The major ideas that emerge in constitutional
    prescription can be illustrated by means of a
    simple example of three policymaking centers
    faced with a two-dimensional, group-choice
    problem in which any one of four possible
    constitutional rules may be selected.
  • Even though this is a simplified example, it
    nevertheless graphically captures the essential
    features of the constitutional selection problem.
  • The preferences of the individual policy centers
    among the various policy combinations are
    represented by the indifference curves drawn in
    Figure 9.1.

Preferences and collective choice for three
policymaking centers
Location of a Public Good from City
Investment Timing
Preferences and collective choice for three
policymaking centers, continued
  • Points A, B, and C represent the policy
    combinations most favored by policy center 1, 2,
    and 3, respectively and the utility levels
    associated with the various indifference curves
    satisfy the relation,
  • As travel costs are borne by the consumers of the
    public goods, policy centers 1 and 3, who happen
    to represent neighboring consumer interests,
    prefer essentially the same site location.
  • Policy center 1 is more impatient than policy
    center 2 who, in turn, is more impatient than
    policy center 3.
  • The policy centers time preferences are revealed
    by their attitude toward the timing of the
    governments investment in the public good.
  • The more impatient the policy center, the sooner
    they prefer the investment and associated
    financing take place.

Preferences and collective choice for three
policymaking centers, continued
  • The lines, AB, AC, and BC, connecting the most
    favored combinations are loci where the
    indifference curves of policy center i and policy
    center j are tangential to
    each other i.e., they are the corresponding
    contract curves.
  • Note that for any policy combination outside
    , there is at least one combination in which
    is Pareto superior to it and will, therefore, be
    unanimously preferred by all policy
  • centers.

  • There is a large set of constitutional rules that
    could be evaluatedexpert rule (or almost expert
    rule), tie-breaking chairman rule, rule of the
    chairman and two aids, unanimity, restricted
    simple majority rule, multiple majority rule,
    simple majority rule.
  • Assume that only four collective choice rules are
    admissible at the constitutional phase. These
    rules are
  • Elect one policy center who will serve
    as the sole decision maker on all policy issues
  • Conduct a referendum over pairs of policy
    alternatives where the winner in each pair is
    decided by simple majority, and no bargaining
    and/or coalition formation is permitted
  • Use the same procedure as under
    referendum, but bargaining and coalition
    formation are allowed (voting cum bargaining).
  • Select a policy combination with which
    all policy centers concur (unanimity).

Evaluation of Alternative Constitutional Rules
Presidential System
  • Under a presidential system ( ), there are
    three possible political solutions A, B, and C.
  • The policy centers expected utility is then

Evaluation of Alternative Constitutional Rules
  • If a referendum ( ) is selected, every point in
    is a likely candidate for a solution since the
    path selected in the operation phase cannot be
    foretold with certainty.
  • The policy centers expected utility is then

where is the area of .
Evaluation of Alternative Constitutional Rules
Voting cum bargaining
  • Under voting cum bargaining ( ), the set of
    possible political solutions depends on the
    solution concept employed.
  • There are three possible solutions policy
    combination D corresponding to the coalition
    structure policy combination E
    corresponding to coalition structure
    policy combination F corresponding to
    coalition structure
  • . Under this constitutional rule,
    the policy centers expected utility is

Evaluation of Alternative Constitutional Rules
  • The political solution under unanimity ( ) is
    the outcome of a bargaining game and depends
    again on the solution concept employed.
  • The policy centers expected utility is then

Bargaining Costs
  • Let denote the cost of reaching a
    decision (decision cost) per policy center
    associated with the selection of constitutional
    rule then one expects
  • Note that consists mostly of the
    negotiation cost but may include other types of
    costs, such as losses due to calculation errors.
  • is the smallest since, under the
    presidential system assumed here, collective
    decisions are made by a single person.
  • is the greatest, since, under
    unanimity, each individual enjoys a veto power.
  • is greater than since
    involves bargaining
  • while does not.

Bargaining Costs, continued
  • Even though the mean values of the political
    solutions under alternative constitutional rules
    are similar, large differences exist among the
    corresponding spreads.
  • When is small, a political solution
    maximizing the well-being of policy centers in
    at the expense of those not in is easily
  • When is large, its policy centers
    preferences are more diverse and the solution
    agreed upon by policy centers in is less
    likely to maximize their preferences at the
    expense of the policy centers excluded from

Bargaining Costs, continued
  • The disparity is greatest under the presidential
    system and smallest under the unanimity rule
    , with the voting rules
  • ( and ) occupying an intermediate
  • The difference in the spreads of political
    outcomes associated with the two voting rules
    derives from a completely different sourcethe
    wide range of possible decision paths under
    referendum as compared to the limited and
    centrally-oriented set of possible solutions
    under voting cum bargaining .
  • The general pattern of variation in the policy
    centers utility level under the alternative
    constitutional rules reflects the spread of the
    policy combinations under these rules.

Bargaining Costs, continued
  • Note that spread spread
    spread spread .
  • Given the mean preserving spread argument
    implied by the above observation, it follows that
    for sufficiently risk-averse policy centers

Constitutional Space Prescription
  • The scope for prescription at the constitutional
    phase may be decided by alternative rules
    selected in accordance with the sensitivity of
    the policy centers expected utility to the
    ultimate decision and its associated cost.
  • The sole decision-maker case, , exhibits
    maximal spread but minimal bargaining costs, and
    it is usually confined to matters of less
  • To evaluate, define

The structure of (C, V) over the constitutional
rules and policy issues spaces
Expected Utility
Decision Costs