Four Papers I Read Today

Scott Masten, "Public Utility Ownership in 19th-Century America: The 'Aberrant' Case of Water" (Jan 2009). A very interesting historical/empirical study of why utilities for water supply, in contrast to other public utilities, became predominantly publicly owned before the end of the 19th century. Masten finds it was not a consequence of any special public financing issues or scale economies; rather public ownership of water utilities was largely a consequence of two factors: (1) the comparative simplicity of waterworks operation and management, which immunized them public water supply companies to some extent from inefficiencies usually associated with government ownership; and (2) friction between cities and private water companies relating to (a) extension of service to sparcely populated areas and (b) prolonged supply disruptions stemming from installation and repair of waterworks. Among the more interesting implications Masten draws from his historical analysis is that current efforts by World Bank and other organizations to induce developing countries to private waterworks as a mechanism for reducing water shortages may be misguided:

If, despite an institutional environment conducive to private ownership, American water and sanitation systems are overwhelmingly publicly owned and operated, it is reasonable to expect privatization to yield long-term gains in developing countries where the environment for private enterprise may be much less hospitable?

Masten's article provides a very useful reminder that the structure of property ownership is not simply a matter of ideology; nor is private ownership necessarily more economically efficient and productive than public ownership. Among other things, transaction costs matter!

Katherine Casey, Rachel Glennerster, and Edward Miguel, "Reshaping Institutions: Evidence on External Aid and Local Collective Action," NBER Workshop Paper 17012 (May 2011). The authors examine the short- and long-term consequences of a specific international aid program for Sierra Leone and find that, in the short-run, the aid program did achieve its aim of improving provision of local public goods, but failed to achieve the longer-run aim of improving local institutions for collective action. The implications of these disparate findings are interesting. On the one hand, the authors note, "[t]he results contradict the current popular notion in foreign aid circles that CDD ["community directed development"] is an effective method to initiate social change or fundamentally alter local decision-making processes." On the other hand, the "results also challenge the aid pessimist's view that external assistance cannot improve the lives of the poor in countries with weak institutions." Hopefully, other scholars will build on this work by applying the same analytical model to examine aid projects in different developing countries.

Marjan Peeters and Micolien van der Grijp, "Emerging national climate legislation in EU Member States: in search of proper legislative approaches," Maastrict Working Papers, Faculty of Law, 2011-6 (May 2011). A nice comparison of the French and English approaches to national climate legislation (supplemental to the European Union's Emissions Trading Scheme). The English approach is completely centralized and top-down, as is the norm within the UK's system of government. The French program, by contrast, is largely decentralized, with regions given a substantial amount of freedom to determine how national goals will be met. However different they may be, however, the national climate laws of France and the UK share one crucial feature in common: the lack of any enforcement apparatus for ensuring that the legislated goals are met. To my mind, that renders the goals of each country's climate law purely aspirational.

Last, but by no means least, Jeremy Edwards and Sheilagh Ogilvie, "What Lessons for Economic Development Can We Draw from the Champaign Fairs?," CESifo Working Paper No. 3438 (April 2011). This paper turns on its head just about everything we thought we knew about the Champaign fairs, and their significance for economic theories of the institutional basis for long-distance, impersonal exchange. The authors argue, provocatively but pretty convincingly, that the high level of contract enforcement, which made the fairs so successful, did not arise from private-order or corporative mechanisms, but instead was provided by public institutions. The paper seriously restructures our understanding of how and why legal-economic institutions arise.

Happy 100th Birthday Ronald Coase

I've recently started noting historical events instead of celebrating birthdays, but I had to make an exception for Professor Coase, especially on his 100th birthday. His birthday is, in reality, an important historical event because of Coase's stature in both economics and legal studies. Two of his seminal articles - "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960) are among the most widely cited works in both fields. Unfortunately, the later article is too more often cited for the wrong reasons, as both economists and legal scholars continue to misunderstand not only Coase's intention but his analysis (do not read the Wikipedia entry about Coase, unless you want a complete misunderstanding of his work).

Coase was and remains the central figure in the modern Law & Economics movement because he explained why legal rules are such an important component of the economy. The law would not matter if it were costless to use the price system, that is, if transaction costs were zero, because individuals would simply bargain their way around all disputes over entitlements to resources. The reason the law does matter for  economic exchange is that transacting in the market is not costless. Transaction costs are always positive and often quite high. This central insight, while lost on many self-proclaimed "Coasians," who continually cite the "Coase theorem" (so named by George Stigler) and refer to "Coasian bargaining," was the most important combined legal and economic insight of the 20th century.

By the way, the 100-year-old Coase has a new book coming out (co-authored) by Ning Wang, entitled How China Became Capitalist. It will be published by Palgrave Macmillan in June 2011. I wonder how many centenarians have ever published new books?

Carol Rose on "Ostrom and the Lawyers"

University of Arizona law professor, Carol Rose, one of the outstanding property law scholars of our time, has posted a new working paper on the Social Science Research Network on "Ostrom and the Lawyers: The Impact of Governing the Commons on the American Legal Academy." The paper is forthcoming in a special issue of the International Journal of the Commons celebrating the 20th anniversary of Elinor Ostrom's Governing the Commons (Cambridge 1990).

Professor Rose's paper examines the influence of Lin Ostrom's theory of common property regimes on legal scholars since the publication of her famous 1990 book. Not surprisingly, Rose finds that the book exerted great influence on property scholars and law professors writing in environmental and natural resources law. More recently and only a bit more surprisingly, Ostrom's work has engaged the attention of intellectual property scholars. Here is the abstract of Rose's paper:

American legal academics began to cite Elinor Ostrom’s Governing the Commons (GC) shortly after its 1990 publication, with citations peaking in the mid 2000s and with signs of a new peak in 2010 in the wake of Ostrom’s Nobel Prize in Economics. The legal scholars most interested in GC have worked in three areas: general property theory, environmental and natural resource law, and since the mid 1990s, intellectual property. In all those areas legal scholars have found GC and its many examples a strong source of support for the proposition that people can cooperate to overcome common pool resource issues, managing resources through informal norms rather than either individual property or coercive government. Legal academics have also been at least mildly critical of GC as well, however. A number have tried to balance the attractive features of GC’s governance model-stability and sustainability-with more standard legal models favoring toward open markets, fluid change and egalitarianism.

As someone who has written a fair amount about Lin's work myself (in my 2002 Pollution and Property book), I find nothing much to argue with in Rose's article. I only wish she had situated Lin's book within the context of her earlier work, much of it with her husband Vincent, on polycentric governance regimes, where they stress the importance of local authority as part of larger, more complex government institutional structures.

A greater focus on the central importance of polycentricity to Lin's framework would help explain some of the conventional (and contradictory) misunderstandings of Lin's work, by legal scholars and others, as either opposing private property or opposing public regulation. In fact, as Professor Rose notes, Lin opposes neither, but merely argues that in some circumstances other governance mechanisms exist for avoiding what Garrett Hardin called "the tragedy of the commons." Those other governance mechanisms include common property regimes. Such regimes do not always succeed, of course. Nor do they necessarily exist in isolation from other formal or informal institutional structures. As often as not, they are "nested" within a larger complex of institutions, including formal laws.