(2010-06-30) Ostrom Beyond Markets and States - Polycentric Governance of Complex Economic Systems

Elinor Ostrom: Beyond Markets and States - Polycentric Governance of Complex Economic Systems. Common pool resources (CPRs) (commons) and public goods at multiple scales builds on classical economic theory while developing new theory to explain phenomena that do not fit in a dichotomous world of “the market” and “the state.”

The humans we study have complex motivational structures and establish diverse privateforprofit, governmental, and community institutional arrangements that operate at multiple scales to generate productive and innovative as well as destructive and perverse outcomes (Douglass North 1990, 2005).

In this article, I will describe the intellectual journey that I have taken the last half century from when I began graduate studies in the late 1950s

The early efforts to understand the polycentric clean water industry in California were formative for me. In addition to working with Vincent Ostrom and Charles M. Tiebout as they formulated the concept of polycentric systems for governing metropolitan areas, I studied the efforts of a large group of private and public water producers facing the problem of an overdrafted groundwater basin on the coast and watching saltwater intrusion threaten the possibility of long term use. Then, in the 1970s, I participated with colleagues in the study of polycentric police industries serving US metropolitan areas to find that the dominant theory underlying massive reform proposals was incorrect. Metropolitan areas served by a combination of large and small producers could achieve economies of scale in the production of some police services and avoid diseconomies of scale in the production of others.

A common framework consistent with game theory enabled us to undertake a variety of empirical studies including a meta-analysis of a large number of existing case studies on common-pool resource systems around the world. Carefully designed experimental studies in the lab have enabled us to test precise combinations of structural variables to find that isolated, anonymous individuals overharvest from common-pool resources. Simply allowing communication, or “cheap talk,” enables participants to reduce overharvesting and increase joint payoffs contrary to game theoretical predictions. Large studies of irrigation systems in Nepal and forests around the world challenge the presumption that governments always do a better job than users in organizing and protecting important resources.

the application of empirical studies to the policy world leads one to stress the importance of fitting institutional rules to a specific socialecological setting. “One size fits all” policies are not effective

I.  The Earlier World View of Simple Systems

In the midtwentieth century, the dominant scholarly effort was to try to fit the world into simple models and to criticize institutional arrangements that did not fit

A. Two Optimal Organizational Forms

The market was seen as the optimal institution for the production and exchange of private goods. For nonprivate goods, on the other hand, one needed “the” government to impose rules and taxes to force selfinterested individuals to contribute necessary resources and refrain from selfseeking activities

A single governmental unit, for example, was strongly recommended to reduce the “chaotic” structure of metropolitan governance, increase efficiency, limit conflict among governmental units, and best serve a homogeneous view of the public

B. Two Types of Goods

Pure private goods are both excludable (individual A can be excluded from consuming private goods unless paid for) and rivalrous (whatever individual A consumes, no one else can consume). Public goods are both nonexcludable (impossible to keep those who have not paid for a good from consuming it) and nonrivalrous (whatever individual A consumes does not limit the consumption by others). This basic division was consistent with the dichotomy of the institutional world into private property exchanges in a market setting and governmentowned property organized by a public hierarchy. The people of the world were viewed primarily as consumers or voters.

C. One Model of the Individual

The assumption that all individuals are fully rational was generally accepted in mainstream economics and game theory

II.  Early Efforts to Develop a Fuller Understanding of Complex Human Systems

A. Studying Polycentric Public Industries

introduced the concept of polycentricity in their effort to understand whether the activities of a diverse array of public and private agencies engaged in providing and producing of public services in metropolitan areas were chaotic, as charged by other scholars—or potentially a productive arrangement.

Drawing on the concept of a public service industry (Joe S. Bain 1959; Richard Caves 1964; V. Ostrom and Elinor Ostrom 1965), several studies of water industry performance were carried out in diverse regions of California during the 1960s

evidence pointed out three mechanisms that increase productivity in polycentric metropolitan areas: (i) small to medium sized cities are more effective than large cities in monitoring performance of their citizens and relevant costs, (ii) citizens who are dissatisfied with service provision can

“vote with their feet” and move to jurisdictions that come closer to their preferred mix and costs of public services, and (iii) local incorporated communities can contract with larger producers and change contracts if not satisfied with the services provided, while neighborhoods inside a large city have no voice.

extended to policing and public safety

Not a single case was found where a large centralized police department outperformed smaller departments serving similar neighborhoods in regard to multiple indicators.

the widely held belief that a multiplicity of departments in a metropolitan area was less efficient was not found.

Metropolitan areas with large numbers of autonomous direct service producers achieved higher levels of technical efficiency

We were able to reject the theory underlying the proposals of the metropolitan reform approach

B. Doubling the Types of Goods

led us to reject Samuelson’s twofold classification of goods. James Buchanan (1965) had already added a third type of good, which he called “club goods.”

In light of further empirical and theoretical research, we proposed additional modifications

Replacing the term “rivalry of consumption” with “subtractability of use

Conceptualizing subtractability of use and excludability to vary from low to high rather than characterizing them as either present or absent

Overtly adding a very important fourth type of good—common-pool resources—that shares the attribute of subtractability with private goods and difficulty of exclusion with

These four broad types of goods contain many subtypes of goods that vary substantially in regard to many attributes

When one engages in substantial fieldwork, one confronts an immense diversity of situations in which humans interact

Contrast observing the production of a public good to watching private water companies, city utilities, private oil companies, and local citizens meeting in diverse settings to assess who is to blame for overdrafting their groundwater basin causing massive saltwater intrusion, and what to do next

These individuals all face the same problem—the overdraft of a common-pool resource—but their behavior differs substantially when they meet monthly in a private water association, when they face each other in a courtroom, and when they go to the legislature and eventually to the citizens to sponsor a Special Replenishment District

III.  Developing a Framework for Analyzing the Diversity of Human Situations

effort by colleagues associated with the Workshop in Political Theory and Policy Analysis (the Workshop) to develop the IAD framework

The framework contains a nested

common-pool resources

Public goods:

Private goods

Toll goods: theaters, private clubs, daycare centers (club goods)

Figure 1. Four Types of Goods

set of building blocks that social scientists can use in efforts to understand human interactions and outcomes across diverse settings. The IAD builds on earlier work on transactions (John R. Commons [1924] 1968), logic of the situation (Karl R. Popper 1961), collective structures (Floyd H. Allport 1962), frames (Irving Goffman 1974), and scripts (Roger C. Schank and Robert P. Abelson 1977). The approach also draws inspiration from the work of Arthur Koestler (1973) and Simon (1981, 1995) who both challenged the assumption that human behavior and outcomes are entirely based on a small set of irreducible building blocks.

At the core of the IAD framework is the concept of an action situation affected by external variables

Figure 2. A Framework for Institutional Analysis

The internal working parts of an action situation are overtly consistent with the variables that a theorist uses to analyze a formal game.1 This has meant that colleagues have been able to use formal game theory models consistent with the IAD framework to analyze simplified but interesting combinations of theoretical variables and derive testable conclusions from them

IV.  Are Rational Individuals Helplessly Trapped in Social Dilemmas?

The classic models have been used to view those who are involved in a prisoner’s dilemma game or other social dilemmas as always trapped in the situation without capabilities to change the structure themselves

A. Scholars from Diverse Disciplines Examine Whether Resource Users are Always Trapped

Dramatic incidents of overharvested resources had captured widespread attention, while studies by anthropologists, economic historians, engineers, historians, philosophers, and political scientists of local governance of smaller to medium scale common-pool resources over long periods of time were not noticed by many theorists and public officials

framework in an effort to begin to identify common variables in cases where users had organized or failed to organize

challenged the presumption that it was impossible for resource users to solve their own problems of overuse. The NRC report opened up the possibility of a diversity of studies using multiple methods

B. MetaAnalyses of common-pool Resource Cases

Because of our prior studies of complex urban systems and the development of a framework and common language for linking the parts of complex systems, we could use the framework to help organize our efforts. The IAD framework became the foundation for designing a coding manual that was used to record a consistent set of variables for each common-pool resource study

A key problem was the minimal overlap of variables identified by case study authors from diverse disciplines

In addition to finding significant levels of cooperation, we found some support for earlier theoretical predictions of no cooperation in particular settings.

On the other hand, the capacity to overcome dilemmas and create effective governance occurred far more frequently than expected and depended upon the structure of the resource itself and whether the rulesinuse developed by users were linked effectively to this structure

C. The Bundles of Property Rights Related to common-pool Resources

A common-pool resource can be owned and managed as government property, private property, community property, or owned by no one

Schlager and E. Ostrom (1992) drew on the earlier work of Commons ([1924] 1968) to conceptualize property rights systems as containing bundles of rights rather than a single right. The metaanalysis of existing field cases helped to identify five property rights that individuals using a common-pool resource might cumulatively have: (i) access—the right to enter a specified property,4 (ii) withdrawal—the right to harvest specific products from a resource, (iii) management—the right to transform the resource and regulate internal use patterns, (iv) exclusion—the right to decide who will have access, withdrawal, or management rights, and (v) alienation—the right to lease or sell any of the other four rights.

D. Linking the Internal Parts of an Action Situation to External Rules

E. Long Surviving Resource Institutions

I tried to understand the broader institutional regularities among the systems that were sustained over a long period of time and were absent in the failed systems. I used the term “design principle” to characterize these regularities

Since the design principles are described extensively in E. Ostrom (1990, 2005), I will mention only a brief updated list as developed by Michael Cox, Gwen Arnold, and Sergio VillamayorTomás (2009): 1A. User Boundaries: Clear and locally understood boundaries between legitimate users and nonusers are present. 1B. Resource Boundaries: Clear boundaries that separate a specific common-pool resource from a larger socialecological system are present. 2A. Congruence with Local Conditions: Appropriation and provision rules are congruent with local social and environmental conditions. 2B. Appropriation and Provision: Appropriation rules are congruent with provision rules; the distribution of costs is proportional to the distribution of benefits. 3. Collective Choice Arrangements: Most individuals affected by a resource regime are authorized to participate in making and modifying its rules. 4A. Monitoring Users: Individuals who are accountable to or are the users monitor the appropriation and provision levels of the users. 4B. Monitoring the Resource: Individuals who are accountable to or are the users monitor the condition of the resource. 5. Graduated Sanctions: Sanctions for rule violations start very low but become stronger if a user repeatedly violates a rule. 6. Conflict Resolution Mechanisms: Rapid, low cost, local arenas exist for resolving conflicts among users or with officials. 7. Minimal Recognition of Rights: The rights of local users to make their own rules are recognized by the government. 8. Nested Enterprises: When a common-pool resource is closely connected to a larger socialecological system, governance activities are organized in multiple nested layers.

V.  Conducting Experiments to Study common-pool Resource Problems

A. common-pool Resource Experiments in University Laboratories

B. Studying common-pool Resources in Field Experiments

In summary, experiments on CPRs and public goods have shown that many predictions of the conventional theory of collective action do not hold

VI.  Studying common-pool Resource Problems in the Field

A. Comparing Farmer and Government Managed Irrigation Systems in Nepal

B. Studying Forests around the World

VII.  Current Theoretical Developments

A. Developing a More General Theory of the Individual

B. The Central Role of Trust in Coping with Dilemmas

Even though Kenneth Arrow (1974) long ago pointed to the crucial role of trust among participants as the most efficient mechanism to enhance transactional outcomes, collective action theory has paid more attention to payoff functions than to how individuals build trust that others are reciprocators of costly cooperative efforts. Empirical studies, however, confirm the important role of trust in overcoming social dilemmas

C. The Microsituational Level of Analysis

D. The Broader Context in the Field

VIII.  Complexity and Reform

References

Arthur Koestler. 1973. “The Tree and the Candle.”

Roger Schank and Robert P. Abelson. 1977. Scripts, Plans, Goals, and Understanding: An Inquiry in Human Knowledge Structures