Cooperation in collective action*

The ability to cooperate in collective action problems – such as those relating to the use of common property resources or the provision of local public goods – is a key determinant of economic performance. In this paper we discuss two aspects of collective action problems in developing countries. First, which institutions discourage opportunistic behaviour and promote cooperation? Second, what are the characteristics of the individuals involved that determine the degree to which they cooperate? We first review the evidence from field studies, laboratory experiments, and cross community studies. We then present new results from an individual level panel dataset of rural workers.     

Are modern philosophical accounts of well-being excessively ‘individualistic’?

Do modern accounts of well-being which have influenced, or been adopted by, some economists encourage excessive ‘individualism’? I suggest that this question can be answered by considering two objections to modern views of welfare: (1) that they involve an impoverished view of persons and (2) that they decompose all goods into goods for individuals and do not give intrinsic value to collective goods. I argue that two influential views of well-being—the informed desire view and the capability approach—can convincingly respond to these objections. Both views allow for our distinct social roles and identities: the ways in which social norms and institutions shape values and a concern for others. Neither view sees goods as goods only of specific individuals, nor do they require us to separate out neatly the realisation of values in the lives of various individuals. But that does not imply that goods such as friendship are collective rather than individual goods or that collective goods have intrinsic value. Nonetheless, accounts of well-being may need to be more explicit than they have been in incorporating the social dimension.     

Property and Industrial Organization in Communist and Capitalist Nations

Endogenous growth theorists argue that certain equity-enhancing social institutions enhance growth. Despite the centrality of inequality in these approaches, there is no sense in which economic actors exercise power or collective action to create and maintain social norms and rules that are personally advantageous but socially costly. This despite the work of neoclassical economists on rent-seeking, which posits that efforts to claim unearned revenues can pose significant costs for growth. The question of the impact of gender equity on economic growth is an instructive context for understanding these contradictions. Even though gender practices are inherently about the exercise of power, that they have become a feature of the neoclassical growth literature alights on obvious tensions in the neoclassical institutionalist paradigm. By incorporating insights from both the rent-seeking and feminist economics literatures, we will present analternative explanation of why gender hierarchies persist despite their obvious economic costs.     

An Economic Theory of the Evolution of Governance and the Emergence of the State

Individual's desires to expand wealth in the face of scarcity underlie the evolution of rules and institutions of governance, as individuals attempt to reduce the transactions costs that impede coordination and motivation in an uncertain world. Some wealth-seeking individuals have or develop comparative advantages in violence, however, and behavioral rules and governing institutions may evolve to coordinate joint production of extortion too. The process by which such institutions evolve into a state is discussed. To illustrate the plausibility of this theory, various historical and modern state and non-state governance institutions are shown to be consistent with it.     

The status of happiness

Ever since the advent of advanced commercial societies in the West, writers and thinkers have speculated upon and theorised about the relationship between status and happiness. For example, in the eighteenth century, Jean-Jacques Rousseau argued that the principal source of human unhappiness was our tendency to make invidious comparisons with each other when isolated individuals in the presocial state of nature were forced together by circumstances. This increased proximity fuelled competition for standing in the eyes of others which is the origin of the pervasive unhappiness that he believed was one of the hallmarks of modern civilisation. I argue that this account is partly correct and partly incorrect. On the one hand, there is now substantial credible evidence that supports the view that relative position matters much more to individuals than do absolute levels of wealth. The competition for status that Rousseau saw as a defining feature of modern civilisation has left the vast majority of people much less happy than they would otherwise be by fostering costly expenditure arms races that reduce objective welfare and significantly increase stress and anxiety. On the other hand, there is also mounting evidence that he was wrong that this situation is unnatural. According to some evolutionary biologists, human beings evolved in an environment of scarcity and intense resource competition, where each individual??s position was closely linked to his/her prospects for survival and reproductive success. For most of human history having high relative standing was instrumental in helping individuals to achieve the objectives they instinctively care most deeply about, namely survival and reproductive success.     

人情社会中的制度安排——基于互动行为的博弈分析

在人情社会中,制度安排要适应文化环境。非正式制度安排的自发性、非强制性和广泛性特征体现了这种制度安排在自发形成过程中社会伦理文化的决定性作用。正式制度安排具有强制性,但是,也必须与文化环境兼容,否则这种制度安排就将是无效的,或者是不可持续的。本文基于行为互动的博弈方法,以监考制度为例,以说明人情与制度的冲突,以及如何设计制度以实现集体理性与个体理性兼容,制度与人情兼容问题。     

Normative judgments and spontaneous order: The contractarian element in Hayek's thought

This paper explores the apparent tension between Hayek's moral skepticism and his role as a defender of liberal institutions. It looks at Hayek's concept of spontaneous order, and asks whether there are any grounds for claiming that spontaneous orders have moral value. The argument from group selection is considered but rejected. Hayek is interpreted as putting most weight on arguments which show, for specific orders (such as the market and common law) that their rules assist each individual in the pursuit of his or her ends, whatever those ends may be. It is suggested that this form of argument is contractarian in character. However, Hayek's contractarianism is distinctive in that it looks for agreement among individuals within an ongoing social order, rather than among rational agents who stand outside any particular society. This paper was written while I was a Visiting Scholar at the Social Philosophy and Policy Center, Bowling Green State University; I am very grateful for the Center's support. An early version was presented at the Friedrich August von Hayek Memorial Symposium in Freiburg, in June 1993. In revising the paper, I have benefited from the comments of the participants at that symposium.     

The diversity of institutional rules as engine of change

The target paper by Elinor Ostrom in this Special Issue carries a clear message about her research agenda: be attentive to institutional diversity, be aware of the danger of ‘monoculture’ and ‘monocropping’ of rules. Although Ostrom was fully aware of the necessity to focus on relevant and simplified variables in order to build general explanations, she deliberately adopted a bottom-up research strategy that opposes the top-down approach dominating social sciences. Her framework, developed through extensive field studies, shows the central role of “clusters” of rules in defining institutions and understanding how they change. My discussion is organized around this privilege conferred to rules. Section 2 posits her contribution, particularly her IAD model, in relation to New Institutional Economics. Section 3 focuses on what I consider her main contribution: her analysis of rules as the strategic point through which changes happen. Section 4 discusses some methodological issues, and Sect. 5 concludes.     

Hayek and Keynes: From a common critique of economic method to different theories of expectations

The methodological positions of Hayek and Keynes contain striking similarities. Both authors opposed empiricist approaches to economics that assign priority to mere observation as the source of knowledge. Both emphasised intentionality, motivation and human agency. Notwithstanding this common ground, they had different conceptions of how beliefs are formed and had different explanations of thought and action in economics. Hayek grounded his explanation on an evolutionary theory of the mind, i.e. on psychological premises, whereas Keynes based his view of belief formation on probable reasoning, where probability is a logical concept. Starting from psychological premises Hayek maintained that individuals act rationally only by following rules. As a consequence, he considered conventional expectations to be the primary guide for agents in economic life. Keynes agreed that conventional expectations actually guide economic behaviour, but he maintained that they are justified only in situations of total ignorance. In conditions of limited knowledge, agents can base their action on reasonable expectations, independently of conventions. Moreover, agents?particularly those institutions responsible for economic policy?ought to shun conventional behaviour in order to counteract its negative social consequences. We argue that Keynes's theory of expectations is well grounded upon his theory of logical probability. Hence his advocacy of discretionary policy is rationally justified.     

Integration and diversity

Experimental Economics - We study a setting where individuals prefer to coordinate with others but they differ on their preferred action. Our interest is in understanding the role of link formation...     

Mindreading and Manipulation in an Ecology of Prisoner’s Dilemma Games: Laboratory Experiments

Synopsis Humans have a rational reason to seek out and selectively play Prisoner’s Dilemma games with others who (for whatever reason) will play cooperatively, while avoiding those who will defect. It follows that they also have reason to try and persuade others that they will personally cooperate if a game is joined (using the term from Evolutionary Psychology, to ‘manipulate’ others’ beliefs) and, thus, to penetrate to the truth underlying such efforts (to ‘mindread’ others intentions). We develop an economic model of mindreading and manipulation that can govern exchange relationships in natural circumstances, and report laboratory data showing that, absent constraining institutions that make play with cooperators likely, intending defectors are more likely to be chosen as partners than are intending cooperators. Intending defectors’ efforts at manipulation appear to be more successful than their potential victims’ efforts at mindreading. The findings suggest the nature of the problem that must be addressed for would-be traders in the absence of well-enforced rules governing contracts, and we discuss the patterns of behavior that are likely responses in such circumstances.     

Institutional obstacles to African economic development: State, ethnicity, and custom

To account for the African growth tragedy and, in particular, for its causes rooted in governance problems, the institutional legacy that African countries inherited from pre-colonial and colonial times must be considered. Three aspects are examined here. First, the relationship between ethnicity and state performance is bi-directional: if strong ethno-regional identities prevent the emergence of modern citizenship, they themselves constitute an endogenous outcome of continuous state failures. Second, the persistence of informal rules and social norms causes legal dualism, which undermines the credibility of modern statutory law. Third, social customs and norms that hinder socio-economic differentiation and individual capital accumulation lower the performance of indigenous enterprises.     

Politics as exchange: the classical liberal economics and politics of James M. Buchanan

James Buchanan advocated the market mechanism for allocating resources because it is based on voluntary exchange. People engage in market transactions only when they believe they benefit from doing so. Buchanan depicted the political process the same way. People engage in collective activities to accomplish together ends that they would be unable to accomplish individually, or through bilateral exchange. Buchanan’s vision of politics as exchange is a normative framework for evaluating the rules within which political activity takes place. Rules that meet the criterion of agreement are desirable constitutional rules, and Buchanan recognized that not all government activity satisfies that criterion. Buchanan is the father of the subdiscipline of constitutional political economy, and his “politics as exchange” approach provides the foundation for much work in that area. Buchanan has created a foundation that is rich in ideas, but leaves behind a number of unanswered questions that point the way toward a further development of the research program in constitutional political economy.     

The Participatory Economy. An Evolutionary Hypothesis and a Strategy for Development

This article proposes a synthetic new concept of logics of action, intending to apply it to the market, the family, and the polity (inclusive of the state and the community) as crucial instances of what may be termed provisioning domains. These are the broadest or most general domains in which economic activities take place. This article defines a logic of action as a set of socially shared rules of thought and behavior (i.e., socially shared mental models and behavioral rules) that involve a domain of action, the metric used, and the objectives or obligations associated with the positions people occupy in this domain. The domain by itself does not suffice to characterize a logic, and it has to be combined with the other two aspects. The article further discusses the relation between logics of action and institutions, arguing that logics of action are institutions with specific characteristics. They are conceived in relation to very broad provisioning domains and, as such, they have a high degree of generality. The market, the family, and the civic logics may be called provisioning institutional logics, but important differences do exist between the proposed concept herein and some treatments of institutional logics.     

Cognition,imagination and institutions in demand creation

Formal rationality plays a limited role in human cognition, which originated in the creation of patterns to interpret phenomena and link phenomena with action. The creation of new patterns rests on imagination, not logic, typically stimulated by a perceived inadequacy in established patterns. Internal routines of the brain and external institutions form structures of cognitive capital; the institutions of markets, including money prices, aid the development of consumption capital, which simplifies most choices and provides scope for selective experiment and innovation in creating goods. Such innovation depends on differences between individuals and changes in their circumstances.     

Network Games

In contexts ranging from public goods provision to information collection, a player's well-being depends on his or her own action as well as on the actions taken by his or her neighbours. We provide a framework to analyse such strategic interactions when neighbourhood structure, modelled in terms of an underlying network of connections, affects payoffs. In our framework, individuals are partially informed about the structure of the social network. The introduction of incomplete information allows us to provide general results characterizing how the network structure, an individual's position within the network, the nature of games (strategic substitutes vs. complements and positive vs. negative externalities) and the level of information shape individual behaviour and payoffs.     

Adaptationist punishment in humans

Immanuel Kant, Adam Smith, Charles Darwin, George Williams, and Stephen J. Gould, among others, have pointed out that observing that a certain behavior causes a certain effect does not itself license the inference that the effect was the result of intent or design to bring about that effect. Compliance with duty might not reflect the action of conscience, gains in trade might not be due to the benevolence of traders, and fox paws might not be designed to make tracks in snow. Similarly, when person A inflicts costs on person B and, in so doing, generates benefits to C, D, and E (or the group to which A through E belong, in aggregate), the inference that A’s imposition of costs on B is by virtue of intent or design to bring about these welfare gains is not logically licensed. In short, labeling punishment “altruistic” because it has the effect of benefitting some individuals is inconsistent with key ideas in philosophy, economics, and biology. Understanding the ultimate cause and proximate design of the mechanisms that cause people to punish is likely to be important for understanding how punishment can help solve collective action problems.     

THE DEFECTIVE DESIGN OF FEDERAL DEPOSIT INSURANCE

Deposit insurance funds, especially the Federal Savings and Loan Insurance Corporation, are currently in visible trouble. Two central defects of the existing deposit insurance system are identified: (1) mispricing of the insurance premiums and (2) incentives for both the industry and the insurance agencies to postpone recognizing and realizing losses.
Insurance premiums are mispriced because they are assessed at the same rate for all institutions, which creates a bias for banks to take greater risks. Practical difficulties of setting an appropriate risk-based premium for each bank are real but not necessarily insurmountable. In particular, the sale by the bank of unsecured and uninsured debt could provide a market measure of default risk, under a given failure rule.
The choice of a failure rule is also a critical matter. Current failure rules are poorly defined and permit insolvent institutions to continue in operation. Specifying a market value test of insolvency in the statutes would be helpful, but it would have to be supported by market-value accounting requirements and stronger pressures on banking authorities not to defer action.     

Should public policy respond to positional externalities?

A nice suit is one that compares favorably with those worn by others in the same local environment. More generally, a positional good is one whose utility depends strongly on how it compares with others in the same category.¹A positional externality occurs when new purchases alter the relevant context within which an existing positional good is evaluated.² For example, if some job candidates begin wearing expensive custom-tailored suits, a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers. From any individual job seeker's point of view, the best response might be to match the higher expenditures of others, lest her chances of landing the job fall. But this outcome may be inefficient, since when all spend more, each candidate's probability of success remains unchanged. All may agree that some form of collective restraint on expenditure would be useful.In such cases, however, it is often impractical to negotiate private solutions. Do positional externalities then become legitimate objects of public policy concern? In attempting to answer this question, I employ the classical libertarian criterion put forth by John Stuart Mill³, who wrote the state may not legitimately constrain any citizen's freedom of action except to prevent harm to others. I argue that many positional externalities appear to meet Mill's test, causing not just negative feelings but also large and tangible economic costs to others who are ill-equipped to avoid them. I also discuss an unintrusive policy remedy for positional externalities, one modeled after the use of effluent charges to curb environmental pollution.The paper is organized as follows. Section 1 notes the deep similarity between the conditions that give rise to positional arms races and those that give rise to conventional military arms races. Section 2 follows with a review of evidence concerning the strength of concerns about relative position. Section 3 describes some of the tangible economic costs that people experience as a result of positional externalities arising from such concerns. Section 4 takes up the question of whether collective action directed against positional externalities is consistent with respect for individual rights. Section 5 describes how a progressive consumption tax could neutralize many of the most costly effects of positional externalities.