elinor ostrom and the robust political economy of common-pool resources

Journal of Institutional Economicshttp://journals.cambridge.org/JOI

Additional services for Journal of Institutional Economics:

Email alerts: Click hereSubscriptions: Click hereCommercial reprints: Click hereTerms of use : Click here

Elinor Ostrom and the robust political economy ofcommon-pool resources

MARK PENNINGTON

Journal of Institutional Economics / Volume 9 / Issue 04 / December 2013, pp 449 - 468DOI: 10.1017/S1744137413000258, Published online: 28 August 2013

Link to this article: http://journals.cambridge.org/abstract_S1744137413000258

How to cite this article:MARK PENNINGTON (2013). Elinor Ostrom and the robust political economy of common-poolresources. Journal of Institutional Economics, 9, pp 449-468 doi:10.1017/S1744137413000258

Request Permissions : Click here

Downloaded from http://journals.cambridge.org/JOI, IP address: 155.97.178.73 on 01 Jul 2014

Journal of Institutional Economics (2013), 9: 4, 449–468C© Millennium Economics Ltd 2013 doi:10.1017/S1744137413000258First published online 28 August 2013

Elinor Ostrom and the robust politicaleconomy of common-pool resources

M A R K P E N N I N G T O N∗

Political Economy, King’s College, University of London, London, UK

Abstract: This paper situates Elinor Ostrom’s work on common-pool resourcemanagement in the tradition of ‘robust political economy’. Ostrom’s analysis ofbottom-up governance institutions is shown to recognise that such arrangementsthough imperfect are better placed to cope with bounded rationality and incentivecompatibility problems in the management of smaller- and medium-scalecommon-pool resources. While Ostrom’s work provides an analytical frameworkto explain the success of these arrangements, however, the paper argues that itlacks a robust account of when, if ever, top-down governance arrangements are tobe preferred.

1. Introduction

Elinor Ostrom received the Nobel Prize in Economic Science honouring hertheoretical and empirical work on the management of common-pool resources.A key contribution of this work was the recognition not only that decentralisedforms of governance can address commons dilemmas but the suggestion that suchforms of governance are often better placed to deliver sustainable managementthan more centralised alternatives.

This paper argues that Ostrom’s advocacy of ‘bottom-up’ institutions shouldbe seen as an example of ‘robust political economy’ (RPE) analysis. TheRPE perspective examines how alternative regimes cope with the constraintspresented by non-ideal conditions. Within this context, Ostrom explains therelative superiority of decentralised governance arrangements in coping withbounded rationality and incentive compatibility constraints. The paper suggestshowever that her approach fails to explain whether more ‘top-down’ governanceprocedures can deliver effective solutions when the possibilities for ‘bottom-up’alternatives to common-pool dilemmas are in fact limited.

In order to explicate these points, the analysis is structured as follows. Thesecond section outlines the principles of RPE setting out the role of boundedrationality and incentive compatibility and illustrating their relevance in thecontext of post-war debates about the relative efficacy of private markets andgovernmental planning. The third section shows how Ostrom adopts aspects

∗Email: [email protected]

449

450 M A R K P E N N I N G T O N

of this framework in arguing for decentralised governance institutions thattranscend the markets versus states dichotomy. The final section argues that whileOstrom offers a plausible account of the robustness of decentralised governancein managing some common-pool problems, she provides little explanation ofwhether more centralised decision-making structures might be preferred in theabsence of decentralised alternatives. The paper proceeds to suggest that aconsistent application of RPE reasoning and some of Ostrom’s own theoreticalinsights implies that in many of these contexts no solution may be preferable toa centralised ‘cure’.

2. Robust political economy and comparative institutions analysis

The concept of RPE posits that the comparative evaluation of political–economic institutions must recognise the significance of human imperfections.An institution may be judged robust if it is able to operate effectively in non-ideal circumstances (Boettke and Leeson, 2004; Boettke et al., 2007; Leeson andSubrick, 2006). If people are perfect or at least perfectible, then questions ofcomparative institutional analysis cease to arise because beneficial outcomes arelikely irrespective of the framework in place. ‘Ideal theories’ that assume awayhuman imperfections are of limited utility because the necessity of choosingbetween institutions arises owing to the constraints presented by non-idealconditions.

The RPE framework identifies two human imperfections that should be ac-counted for in the task of institutional evaluation. The first is limited knowledgeor bounded rationality. People are constrained in their cognitive capacitiesand must make decisions on the basis of theories that may prove mistaken(Gigenrenzer and Selten, 2002; Hayek, 1948a). Decision-making occurs underchronic uncertainty where information is often contradictory. This uncertaintyis not reducible to a problem of imperfect information that can be addressedby searching for additional data known in principle to be available. The latterunderstanding assumes that mistakes may be anticipated by decision-makers butmay not be worth avoiding given the cost of searching out additional data. Theproblem of uncertainty, however, extends beyond issues that can be analysed inprobabilistic terms to encompass ‘radical ignorance’. It is not simply that actorsmay not know which possibility out of a given set will occur, but that the setof possible outcomes is unbounded and thus unknowable. Robust institutions,therefore, are those which allow people to adapt to and learn from un-anticipatedmistakes and unforeseen opportunities (O’Driscoll and Rizzo, 1996).

The second human imperfection that the RPE framework draws attentionto is the problem of opportunism. Actors may follow their own self-interestedgoals – material or non-material – rather than some notion of the ‘public interest’.Self-interested behaviour itself should not be seen as evidence of ‘imperfection’but the possibility that people may act opportunistically in pursuit of their

Elinor Ostrom and the political economy of common-pool resources 451

interests to the disadvantage of others must be taken into account. Incentivesmatter and, as a consequence, institutions must be judged on their capacity tochannel potentially self-interested motivations in ways that generate mutuallybeneficial outcomes (Ostrom, 2006).

It should be emphasised here that the existence of limited knowledge isfundamental to the RPE framework whereas the problem of opportunismis not. If the assumption of opportunistic behaviour is dropped, the needfor comparative institutional evaluation remains because even other-regardingactors require a process that enables them to cope with the possibility oferror. If the assumption of limited knowledge is dropped, however, thenthe case for comparative institutions analysis is made redundant becausegeneralised omniscience implies that people can monitor and discipline narrowlyopportunistic actors irrespective of the institutional context.

The RPE perspective as set out above implies recasting how economists andespecially those within the neo-classical tradition evaluate institutional regimes.At issue is the frequent failure of general equilibrium theories that emphasise thesuperiority of ‘free markets’ or more ‘interventionist’ regimes, to explain how theprivate and public actors concerned are able to acquire the levels of informationneeded to achieve efficient outcomes. Unless such an account can be offered thenthe value of these approaches is compromised because the normative conclusionsamount to no more than proof of what is in fact assumed (Boettke, 1997; Hayek,1948a: 45).

To question the implications of general equilibrium analysis, however, is notto imply that the concept has no use. From an RPE perspective, what is requiredis not abandonment of equilibrium as an idea but of those approaches that treatequilibrium states either as a description of the real world or as a description ofhow the world can and should be made to function (Boettke, 1997). Departuresfrom ideal typical conditions focus attention on how different institutions copewith the actual conditions of ‘real-world’ human interaction. The task of an RPE,therefore, is not to highlight the failure of institutions to attain idealised statesof ‘perfect’ efficiency but to provide explanations for the degree of coordinationwitnessed under different institutional regimes as they grapple with non-idealconstraints.1

Within this context, one of the most important applications of the RPEframework has seen an attempt by classical liberal political economists to specifythe relative robustness of private, market-based forms of resource allocation.Post-war neo-classical economics concluded that given general equilibrium

1 In a sense this makes the RPE framework an application of Demsetz’s (1969) request for economistsand policy analysts to avoid the ‘nirvana fallacy’ – the comparison of an imperfect status quo with advocacyof an idealised institutional alternative. What distinguishes the RPE framework from Demsetz’s perspectiveis the placing of ‘knowledge problems’ beyond those than can be analysed in terms of ‘information searchcosts’ at the centre of comparative institutions reasoning (see Boettke et al., 2007).


assumptions of perfect information, perfect competition and zero transactioncosts there was little to choose in efficiency terms between a free enterprisesystem and a regime where most investment and production decisions are madeby the state. It further suggested that in those circumstances where market-based systems take place under conditions of imperfect information, imperfectcompetition and positive transaction costs that targeted government interventioncould improve on the market outcome (Boettke, 1997).

From the perspective of classical liberal political economy, however, theseconclusions said more about the questionable value of the general equilibriumperspective as a normative benchmark than they did about the relative robustnessof ‘real-world’ market and state-directed systems. The classical liberal case forthe superiority of private markets rests not on claims that market actors are fullyrational, possess complete information, or that transaction costs are zero, buton the suggestion that market processes may be better placed than state-directedalternatives to cope with a world where these conditions are absent (for example,Boettke, 1997; Leeson and Subrick, 2006).

Following Hayek (1948b), a market system is judged more robust in acontext of limited knowledge because it reduces the need for producers andconsumers to have direct knowledge of all of the facts that impinge on thescarcity of resources. Dispersed individuals and organisations make bids forresources reflecting preferences, the availability of substitutes, and alternativeproduction techniques much of which is tacit and known only to the actorsconcerned. As they engage in trade, however, ‘bits’ of this information arecommunicated indirectly to others via the generation of price signals that helpto inform subsequent adaptations made by these actors. The case for market-generated prices made here is not that they convey ‘perfect information’, but thatthey convey more socially useful knowledge than would be possible were a singleplanning authority to be responsible for resource allocation. Such an authoritywould need to rely on direct commands to allocate resources but no commandstructure could ever grasp as much about the constantly changing conditionsof supply and demand as a network of exchanges reflecting the knowledge andactions of multiple private traders (see Friedman, 2006, for a recent example ofthis position).

A second implication of taking limited knowledge as a starting point is therecognition that ‘real-world’ decision-makers whether public or private do notknow what goods to produce, at what prices to sell and which input combinationsto use. The task of coordinating economic plans occurs under uncertaintywhere information is often contradictory. Private markets, however, may bebetter placed to facilitate a process of learning and adaptation in light of thisuncertainty. Profit and loss accounting combined with freedom of entry and exitallows a wider range of competing production and consumption ideas to beevaluated than would be the case were there only one decision-making authorityor were such an authority to determine how much and what kind of decentralised


experimentation to permit. Mistakes will be made but the possibility of suchmistakes being systemic in character may be increased in an institutional contextthat allows the opinion of any one authority or majority to be enforced by law(Friedman, 2006).

The classical liberal perspective exemplified in the writings of the Virginiaschool of public choice has also deployed the RPE framework to questionthe conclusions inferred by neo-classical theories that focus on incentivecompatibility issues in their analysis of market imperfections. According toStiglitz (1994) and his followers, the existence of information asymmetries,principal agent problems, externalities and positive transaction costs in real-world markets generates outcomes that could be improved by governmentsdesigning and enforcing appropriate rules and regulations. From the Virginiaschool perspective, however, comparative institutions analysis suggests that thesevery problems may be magnified in the real world of democratic politics andbureaucratic administration. Though principal agent problems and informationasymmetries are pervasive in markets, where consumers or stock-holders retainthe right to ‘exit’ individually from relationships with suppliers or managers,they have incentives to acquire more information about possible alternativesbecause their personal decision to exit is decisive in determining which servicethey will receive. By contrast, when individual voters cannot, save for leavingthe relevant country, exit from relationships with politicians and regulators, theyare forced into a series of collective action problems where decisions to acquiremore or less information have only an infinitesimal chance of affecting theirpersonal outcome (Boettke et al., 2007).

3. Elinor Ostrom, robust political economy and common-pool management

It should be emphasised at this juncture that though the RPE framework hasbeen used to build a case for the superiority of predominantly private-enterprisesystems, there is no necessary connection between this form of analysis andthese particular normative conclusions. The way is open for both theoreticaland empirical analyses that can explain how alternative institutions might copemore effectively with bounded rationality and incentive compatibility in specificproblem situations. It is within this context that Elinor Ostrom’s work should beviewed. Ostrom herself does not use the term ‘robust political economy’ but inGoverning the Commons and more recent publications what she describes as the‘institutional analysis and development framework’ incorporates key elementsfrom the RPE perspective to argue for the superiority of governance structuresthat transcend the private enterprise versus state ownership dichotomy in thecontext of common-pool resource management.2

2 In later work, Ostrom herself makes increasing use of the term ‘robustness’ in the context ofdiscussing the case for polycentric governance arrangements (see for example Ostrom, 2006: chapter 9).


Prior to Ostrom, most work on common-pool resources had assumed thatall such assets suffered from the same dynamic, reflecting a basic incentivecompatibility constraint. In the absence of exclusion devices enabling peopleto profit personally from resource conservation, it was argued that ‘free riding’behaviour would predominate and thus lead to resource depletion. The only wayto internalise externalities and to avoid the ‘tragedy of the commons’ would be tohave an external body impose a management structure on the resource (Hardin,1968). This could take the form of either private ownership where exclusiverights to extract fish, timber, water etc. are assigned to individual owners or itcould involve the government taking responsibility for the asset either by directownership or by the imposition of rules and regulations on private actors. Thedebate over the relative effectiveness of these alternatives then proceeded alongfamiliar lines. Some argued that in a context of positive transaction costs, privateownership was inefficient in comparison to state-centric alternatives (Ehrenfield,1972). Others, however, using RPE reasoning maintained that while positivetransaction costs were an obstacle to fully efficient markets, a combination ofHayekian knowledge problems and public choice issues of bureaucratic andspecial interest capture in the state sector provided good reason to believe thatprivate ownership though ‘imperfect’ was the preferable option (for example,Baden and Stroup, 1981; Deacon and Johnson, 1985).

Ostrom’s work represents a direct challenge to the contours of this debate.At an empirical level, she demonstrates that it is not always the case thatcommon-pool resources will be overexploited. There are many instances wherecommunities of resource users have developed and enforced effective ruleswithout external regulation and Ostrom explains when such arrangements arelikely to arise and the primary obstacles to their formation. Specifically, wherethere are potential boundaries to a resource, where there are procedures forresolving disputes, and where the community concerned has sufficient decision-making autonomy to create, monitor and enforce its own rules and to excludeoutsiders, then the tragedy of the commons can be avoided without externalimposition of private or public ownership (Ostrom, 1990: chapter 3).

Second, Ostrom shows that many solutions that have worked to addresscommon-pool problems defy neat categorisation in terms of state versus marketdichotomies. Some of the most successful models of commons managementsuch as those found in the Swiss Alps are ‘mixed regimes’ involving elementsof individual property, common property and public regulation. Regimes of

I am not aware of any explicit attempt to situate Ostrom within this mode of reasoning. The closestexample of such an attempt is contained in Aligica and Boettke (2009), which makes frequent referenceto problems of ignorance and incentive compatibility in institutional design and the relevance of this toOstrom and the wider ‘Bloomington School’ – with a particular emphasis on Vincent Ostrom’s work onpolycentricity and metropolitan governance. Though one of these authors (Boettke) is the originator ofthe RPE label, this particular work does not make explicit reference to the RPE framework as the standardfor comparative institutions analysis that the Ostroms are using.


this character sometimes involve a specific form of public regulation thatOstrom describes as a ‘facilitator state’ (1990: 137). Such a state does not takeover responsibility for managing assets directly but is involved in supplyinginstitutions of dispute resolution that enable local level actors to overcomeresource-based conflicts.

Finally, Ostrom uses a combination of bounded rationality and incentivecompatibility arguments to suggest that the mixed forms of governance which shedescribes as ‘common property regimes’ offer a more robust solution to commonsproblems than centrally imposed versions of private or state ownership.

To understand the specific way that Ostrom applies RPE reasoning, it isimportant to recognise that most common-pool resources are governed by aset of rules but that the origin of these varies across cases (Ostrom, 1990: 50–53). In some circumstances, rules are developed and enforced endogenously bythe resource users themselves, whereas in others they are imposed exogenouslyby an external governing body. Ostrom uses an RPE framework to arguefor the frequent superiority of endogenous rule formation and to drawattention to the inter-relationships that exist between different layers of rulemaking.

Though Ostrom has developed this reasoning further than others, it shouldbe pointed out that she was by no means the first to adopt this perspective.Some of the early proponents of what has come to be known as ‘freemarket environmentalism’ did not in fact favour the top-down ‘imposition’ of‘privatisation’ but argued instead for a ‘bottom-up’ approach, emphasising theco-evolution of customary and common law procedures in defining propertyrights (for example, Anderson and Hill, 1975; 1983; Anderson and Leal, 1991;and more recently Hasnas, 2009). In the desire to separate her analysis fromthose operating within the markets versus states dichotomy, Ostrom (1990:12) fails to distinguish sufficiently between those private property advocatessupporting a centrally imposed form of privatisation from those favouring aremoval of centralised obstacles to endogenous rule development that wouldenable private property and other institutional devices to evolve. This is asignificant omission because the ‘free market environmentalists’ were amongthe first to point out that the external imposition of individual private propertyrights may prove more costly than the maintenance of common property regimes(Anderson and Hill, 1983). It should also be emphasised here that Ostrom herselfconceives of ‘common property regimes’ as an endogenous form of group-based‘privatisation’ which may evolve where individual private property may not bepracticable. Thus

Common property regimes are a way of privatising the rights to somethingwithout dividing it into pieces . . . Historically common property regimes haveevolved in places where the demand on a resource is too great to tolerate openaccess, so property rights have to be created, but some other factor makes it


impossible or undesirable to parcel the resource itself (McKean and Ostrom,1995: 6).

This clarification aside, Ostrom’s support for endogenous solutions toconservation dilemmas can be understood as an application of RPE analysiswhere free-riding dynamics are combined with knowledge problems involved indiscovering the rules best placed to overcome such opportunistic behaviour. It isimportant, therefore, to elucidate the mechanisms Ostrom suggests may addressthese issues both to appreciate the strength of her arguments and to highlight thequestions she leaves unanswered or fails to answer effectively, when decentralisedgovernance may not be a viable option.

Knowledge problem arguments for bottom-up governance

The argument in favour of using external agencies to regulate common-poolresources relies heavily on an idealised situation where those working for therelevant agencies have the knowledge to design and enforce a set of rules thatcan effectively re-align the incentives facing the resource users in question. Ifthis assumption of regulatory omniscience is dropped, however, then thereis no obvious reason to suppose that central regulation will improve on theunregulated outcome. As Ostrom (1990: 10) puts it:

The optimal equilibrium achieved by following the advice to centralisecontrol . . . is based on assumptions concerning the accuracy of information,monitoring capabilities, sanctioning reliability and zero costs of administration.Without valid and reliable information, a central agency could make severalerrors including setting the carrying capacity too high or too low, sanctioningherders who cooperate or not sanctioning defectors.

In a non-ideal context of imperfect information, Ostrom suggests that notonly is there a possibility that central regulation will fail to improve on theinstitutional status quo but that poorly designed and enforced regulations mayactually produce worse results than might otherwise have been achieved (Ostrom,1990: 10–11). This can occur both in a context of direct government regulationand with the external imposition of private property. In the former instance,external regulators may impose excessively onerous requirements on previouslycooperative actors while failing to punish non-cooperative agents, thus tiltingthe overall incentive structure further in a sub-optimal direction. The examplesthat Ostrom cites here include many cases of forestry nationalisation in thedeveloping world where, in countries such as Thailand, state ownership hascreated a situation more akin to an open-access resource (1990: 23). In thecase of privatisation, those charged with parcelling out private property rightsmay lack knowledge about the character of the resource base to judge how thespecific bundle of private rights should be defined, the costs of enforcing theserights and how their definition will relate to wider resource systems which mayneed to be held in common (see also Anderson and Hill, 1983). This has, for


example, been reflected in the mixed record of schemes for water privatisationin the developing world, where endogenously developed mechanisms for thesharing of risk have sometimes been undermined (Von Weizsacker et al.,1995).

Within this context, Ostrom makes a comparative institutions/RPE argumentin favour of allowing scope for resource users to develop and enforce their ownrules. Such rules are deemed preferable because actors involved in the dailymanagement of assets are more likely to possess information about the specificcharacter of a resource, the scope for drawing up boundaries and the behaviourof users than the employees of an external regulatory body (Ostrom, 1990: 17–20). Some of this information might be gathered by such an agency if sufficientresources could be devoted to this task, but this may prove more costly thanrelying on the information of those ‘on the ground’. There is, however, a stilldeeper issue of bounded rationality, which suggests that there are certain typesof knowledge that central regulators are unlikely to access, even in principle.Knowledge of the cultural norms and values that structure the way in whichpeople perceive and respond to resource management issues and how thesevalues evolve is embedded in the minds and everyday culture of those in thecommunity concerned. This is what Hayek (1948b) refers to as knowledge ofthe ‘circumstances of time and place’, which is often tacit and cannot be expressedin verbal statements or regulatory statutes (Ostrom, 1990: 20 and 51).

A second aspect of the knowledge problem pointing in the direction ofendogenous rule formation is the greater capacity of such arrangements tofacilitate experimentation and learning about the rules best placed to addresscommons dilemmas. Decision-making over natural resources does not start froma situation where knowledge of the most effective institutional form is ‘given’ inadvance.

What matters is whether the knowledge derived from successes and failurescan be put to good effect in an evolutionary process. Ostrom contends thatdecentralised, polycentric arrangements enable a more effective process oftrial-and-error learning than monocentric alternatives (Ostrom, 1990: 200;2006: chapter 9). Polycentricity refers to social systems where there are manydecision centres whether private, communal or public, that can act relativelyautonomously within their own specified domain but which operate under anoverarching system of rules. In a polycentric order, the macro-level rules arefocussed on maintaining order and resolving disputes rather than specifyingthe objectives or management techniques that the constituent elements shouldfollow (for a recent exposition of polycentricity, see Aligica and Tarko,2012).

Ostrom suggests that many common-pool resources are suited to polycentricgovernance because they are not completely indivisible goods. Most are territorialgoods and the institutional circumstances of their supply can vary withincountries, between regions and much smaller localities. The advantage of such


variation is that it facilitates a process of ‘parallel adaptation’ where a variety ofinstitutional devices such as private property, communal property and variousmixed regimes coexist and where people can copy and adapt the most successfulpractices to their own circumstances (Ostrom, 2006: 281–282). These processeswill not generate ‘optimal’ solutions, but by allowing for a wider process oftrial-and-error evolution they increase the chance of discovering beneficial rulesand reduce the possibility of large-scale systemic failure, relative to alternativeswhere there is only one rule-making body. As Ostrom explains:

Where there is only a single governing authority, policy-makers have toexperiment simultaneously with all the common pool resources within theirjurisdiction with each policy change. And once a change has been made furtherchange will not be made rapidly . . . . Thus, an experiment that is based onerroneous data about one key structural variable or one false assumptionabout how actors will react can lead to a very large disaster . . . The importantpoint is: If the systems are relatively separable, allocating responsibility forexperimenting with rules will not avoid failure, but will drastically reduce theprobability of immense failures for an entire region (Ostrom, 2006: 284).

These arguments in favour of inter-jurisdictional competition are in manyways analogous to the RPE arguments invoked by classical liberal thinkers,emphasising the knowledge-generating properties of market competition(Boettke et al., 2011: 211). They also mirror the case made by Ostrom andher husband Vincent in favour of ‘fragmented’ decision-making structures inthe context of metropolitan governance. Against a tide of policy analysisadvocating the efficiency advantages of consolidated local governance structures,the Ostroms suggested that fragmented or polycentric structures were best placedto adapt to the diversity of circumstances pertinent to effective public servicedelivery on a variety of scales (for example, Ostrom, 1999; Ostrom and Parks,1999).

In no way, however, does such ‘invisible hand’ reasoning suggest a belief thatpolycentric governance produces an efficient equilibrium solution. Rather, robustgovernance requires a disequilibrium discovery procedure (McGinnis, 2005).As in the context of local public service delivery, the arrangements needed toaddress common-pool problems are not fixed but shift over time as technologicaland social innovations enhance the relative effectiveness of alternatives. Theadvantage of a polycentric system of resource management is precisely that itenables a wider range of individuals, groups and authorities at various scalesto craft rules and to strike deals in response to the changing circumstances theyface. This can involve ‘contracting up’ or ‘contracting down’ to higher or lowerlevels of governance depending on the nature of the issue in hand. Such flexibilityis unavailable in a context where there is only one authority through which allattempts to change the rules must be addressed.


Incentive compatibility arguments for bottom-up governance

From Ostrom’s perspective, the ‘knowledge problems’ associated withcentralised governance systems are often compounded by the incentive structurethat such regimes create both for regulators and those they regulate.

In the case of regulators, when external bodies take over responsibility fora resource, their employees often have relatively weak incentives to devise andto enforce an appropriate set of rules since their status and income is largelydetached from success at the local level (Ostrom, 1990: 23). As emphasised bypublic choice theory, centralised regulatory agencies create a massive principalversus agent problem for the populace at large. With minimal chance of affectingthe operations of such agencies, individual voters have little incentive to acquirethe information needed to monitor regulatory performance and the resultingaccountability deficit may enable both regulators and rent-seeking interest groupsto externalise costs (Ostrom, 2006: 277).

In the case of regulatees, where responsibility for managing an asset is heldexternally then those who actually use the resource base may have very weakincentives to follow the appropriate rules. If a competitive advantage can beachieved by breaking the rules and if central regulators are unable or lackincentives to enforce rules effectively owing to the scale of the relevant monitoringproblem, then there is an increased possibility that resource users will engage inrent-seeking behaviour.

Though these incentive-compatibility problems cannot be eradicated, Ostromsuggests that they may be much less pronounced in a context of common propertyregimes embedded in a polycentric system of governance. In general, incentivesto devise and enforce effective rules tend to be stronger when those who have animmediate stake in overcoming a common-pool problem are actively involvedin shaping and enforcing governance arrangements. The transaction costs ofmonitoring and enforcement are also likely to be lower where those who use aresource are in a better position to observe infractions and where the desire tocreate and maintain reputational status is an important source of social capital(Ostrom, 2006: 282).

The latter point is of considerable significance in the Ostromian framework –decentralised governance arrangements are dependent on the existence of socialcapital – a general willingness of resource users to uphold and enforce the rulesand thus to reduce transaction costs. At the same time, however, ‘bottom-up’structures are more likely to generate such social capital than if control of theresource base is held externally. All rules at whatever level of governance requiresocial capital, but in many instances externally imposed rules reduce the incentivefor people to act in ways that generate and maintain the necessary culturalnorms. Abdication of such responsibility to a centralised state reduces the depthof social relationships at the local level, atrophies organisational capacity and,as a consequence, can leave local resource users defenceless against external


groups who may seek to use their influence with central agencies to appropriateresources (Ostrom, 1990: 213).

Though she does not make this argument herself, the possibility of exercisingthe ‘exit’ option afforded by a polycentric structure may also be an importantsource of social capital. As Kurrild-Klitgaard (2010) points out, when institutionsafford actors sufficient scope to disassociate from those who have provedthemselves to be untrustworthy and to associate with those who have a betterreputation for cooperation, then there will be strong background incentivesto maintain the basic norms of promise-keeping and non-shirking, which areessential if there is to be any chance of managing resources sustainably.3

4. Robust political economy and the limits of the Ostromian framework

The analysis thus far has emphasised the RPE arguments in Ostrom’s casefor reliance on endogenous rule formation to manage common-pool resources.Ostrom offers a powerful rejoinder to those arguing for the imposition of privateor public property without recognising the ‘real-world’ constraints that afflictsuch ‘solutions’. Ostrom was, however, keen to emphasise that her approachdoes not suggest that decentralised forms of governance always offer the bestalternative and was explicit in rejecting what she called the ‘panacea trap’(Ostrom, 2012: 69). Thus

There are certainly very important situations where people can self-organise tomanage environmental resources, but we cannot simply say that the communityis, or is not the best; that the government is, or is not, the best; or that the marketis, or is not, the best. It all depends on the nature of the problem we are tryingto solve (Ostrom, 2012: 70).

What she suggests both in analysing the evidence and in explication of various‘action situations’ is that there are many contexts involving small- and medium-scale resources where bottom-up rules could deliver more robust institutionalarrangements but where their potential has been severely limited by top-downregulation. By implication, however, there is a further category of ‘actionsituations’ where the scope for endogenous solutions may be limited by objectivecharacteristics of the relevant assets. This has led some theorists to speculatethat what Ostrom has provided is a theory of ‘optimal decentralisation’. In other

3 This incentives argument in favour of ‘exit’ is one that both Elinor and Vincent Ostrom deploy whenmaking the case for polycentric forms of metropolitan governance which allow for inter-jurisdictionalcompetition. Yet, as Kurrild-Klitgaard (2010) observes, Ostrom never makes this argument for common-pool resources. Indeed, in so far as she discusses the issues raised by both the inward and outwardmigration of people, she seems to believe that this may act to undermine the social capital needed toaddress collective action problems by creating too much cultural heterogeneity (Ostrom, 1990: 212).Kurrild-Klitgaard provides a detailed account of why the exit option may enhance social capital – or atleast the type of ‘bridging’ social capital needed to sustain such practices as promise keeping and adherenceto contracts.


words, that there are some problems best left to decentralised action – andmore of these than was previously thought – but that there remain others wheremore centralised solutions may be required (Aldrich, 2010). The latter seemsmost likely to be the case when there are no clear boundaries to a resource andwhere there are large-scale and mobile populations of resource users leading to asituation of prohibitive transaction costs for endogenous arrangements. Regionaland international air pollution and the problem of anthropogenic climate changeseem to be the most obvious candidates in this regard.

It is not, however, at all obvious from Ostrom what ‘avoiding the panaceatrap’ might imply in such cases. On the one hand, there is certainly no implicationthat decentralised units are always best placed to engage in resource managementdecisions. In the context of the debates on metropolitan governance, for example,both Elinor and Vincent Ostrom are at pains to emphasise that for some servicefunctions centralisation may be appropriate. They note in the context of policingservices that while neighbourhood policing is best conducted by small-scale units,for larger scale problems such as city wide traffic communications and dealingwith criminal networks there may be advantages from ‘contracting up’ servicesto higher jurisdictions (Ostrom, 1999; Ostrom and Parks, 1999). Similarly, inthe context of some larger scale common-pool resources such as the managementof river catchments, the most successful governance structures have often arisenin ‘nested arrangements’ where relatively small groups of water users at the levelof individual water basins have created associations to manage intra-basin issuesbut where these have ‘contracted up’ to form higher level associations to addressinter-basin dilemmas (Ostrom, 1990: chapter 5).

On the other hand, however, what Ostrom is referring to in such cases is aprocess wherein the level of centralisation is itself determined by a decentralisedprocess with lower level units merging to create a superior unit from ‘the bottomup’. In the context of metropolitan governance, for example, she notes:

It is our speculation that starting from smaller units and building upward ismore likely to lead to better solutions than trying to create effective smallerscale units within already constituted larger units (Ostrom and Parks, 1999:300).

Vincent Ostrom (1999) makes a similar case when suggesting that the advantageof polycentric governance structures where authority is divided between a rangeof voluntary associations and political jurisdictions arises from the ability of thedifferent actors to ‘contract up’ or ‘contract down’ with other agents and tocompare and contrast their performance with that of other jurisdictions.

These arguments appear analogous to the classical liberal/Coasian casefor allowing the process of mergers and de-mergers in a competitive marketto determine the amount of ‘central planning’ in the economic system in adecentralised way. Coase notes that decentralised exchange systems come withcosts that are sometimes outweighed by the benefits of centralised management


within large firms, but he was equally eager to emphasise that these efficiencyadvantages can only be discovered in a wider context of decentralised institutionswhere organisations of different sizes compete in an ongoing process. He notes:

To have an efficient economic system it is necessary not only to have marketsbut planning in organisations of an appropriate size. What this mix should bewe find as a result of competition (Coase, 1992: 716).

None of this analysis appears to suggest that there might be circumstances wherea more centralised institution imposed ‘from the top down’ and eliminatinginstitutional competition could be trusted with resource management issues.There are few, if any, case studies Ostrom provides where action by centrallyimposed regulatory or management institutions has produced positive outcomes.While some of her successful case studies do recognise an important role forhigher level authorities, the role of these is typically confined to conflict resolutionprocedures and in some instances the supply of technical and scientific expertisein helping local actors to define resource boundaries.

From the perspective of RPE, a consistent application of Ostrom’s theoreticalconcepts suggests that avoiding the ‘panacea trap’ implies recognising a furtheroption beyond community management, markets and government – that of‘doing nothing’. Beyond a certain point of centralisation, the ability to learn viaa trial-and-error evolution may be so blunted that the scope for systemic failuremay negate any benefits that central regulation might in principle bring. Similarly,the scale of the monitoring problem facing lower level actors, combined with theloss of exit that arises when jurisdictional units exceed a certain scale, may resultin massive potential for rent seeking and the abuse of power. Ostrom’s ownanalysis suggests that bounded rationality and incentive compatibility problemsunder excessively centralised regulation may result in worse outcomes thanwould otherwise prevail. This may be relevant in circumstances where owingto high transaction costs and the inability to organise regulation ‘from below’,governance structures are imposed ‘from the top down’. Crucially, however,it may also be relevant where decentralised units ‘contract up’ responsibilitiesto units of such a scale that the relevant decisions, however mistaken, becomevirtually irreversible. This may be a particular problem where the relevant unitsare political jurisdictions that can block exit options. Depending on the scope forsuch error and abuse, it may be that is not worth the risk of creating institutionsbeyond a certain scale, even if this means that the relevant externality remainsunresolved. Yet, this is a possibility that Ostrom herself does not entertain.

In making a case for centralised regulation, it will not suffice to posit thepotential seriousness of the consequences from failing to address the underlyingissue because it is the possibility that centralised action may magnify these issuesthat is at stake. Consider anthropogenic climate change. This represents themost pressing common-pool problem with potentially massive implications forglobal living standards and quality of life. Yet, clear support for regulatory


action on a global scale would require the validity of some highly implausibleassumptions. The first is that global policy-makers have sufficient knowledge notonly to manage climate patterns by appropriate adjustments to CO2 emissions,but also that they know how to design a set of regulatory tools that willdeliver these reductions – and to do so in a tolerably cost-effective manner.The second assumption is that those involved in the process of regulation willnot abuse the enormous powers at their disposal through rent seeking either byway of bureaucratic expansionism and/or deal-making with powerful interestgroups. Arguably, the most serious common-pool problem of all is that involvedin holding to account centralised authority and nowhere would this be moreproblematic than in the case of global-level institutions, however democraticin character. Given the infinitesimal chance of any voter affecting the decisionsof such an authority, there would be few incentives to monitor and even lesscapacity to affect its performance. Absent omniscience and full motivationalcompliance, then the possibility that the costs of climate change regulation willexceed any benefits must be very real.4

The latter point is not to imply that there is never any possibility of morecentralised actions delivering beneficial results. The Montreal Protocol, whichhas witnessed significant reductions in the use of chlorofluorocarbons (CFCs), forexample, has been widely credited with halting the destruction of the ozone layer.This particular arrangement arose via multi-lateral bargaining between nationstates that agreed to impose controls on CFC use within their borders. Successhere may well have been due to the low costs involved for the millions of affectedparties in switching to what were cheap and widely known substitutes thatmade the agreement effectively self-enforcing. In the context of climate change,however, massive uncertainties about the costs of behavioural change, combinedwith similar uncertainties about how regulatory structures might operate, raisethe possibility that simply adapting to whatever climate changes may occurcould be an equally if not more viable option. One cannot draw an unequivocalconclusion on this front, but at the very least there appear no robust theoreticalgrounds to believe that the risks from ‘doing nothing’ are likely to be any worsethan those resulting from imposing a misguided cure.

Ostrom (2009) comes close to endorsing the view expressed above in her ownaccount of the climate change question but, in the final analysis, is unwilling toendorse the ‘do-nothing’ option. She argues that while the global nature of theclimate change problem may appear to suggest that global regulation is the onlyviable option, this is not so. On the one hand, Ostrom contends that in a context

4 The Stern Report (2007) on climate change estimates that 80% reductions in CO2 emissions could beachieved at a cost of 1% per annum of GDP over a period of 50 years. Given the notorious difficulties thateven national governments have in estimating accurately the cost of minor public infrastructure projects,these figures must surely be treated with scepticism. If the cost over-run on, for example, constructing thenew parliament building in Scotland (which came in 11 times the estimated price) were to be even remotelyapproximated, then the case for attempting to implement such policies must be open to challenge.


requiring immediate action to start the process of reducing emissions, it maytake too long to create the necessary regulatory structures at the global level andto build institutional support for them (Ostrom, 2009: 28). The more attentiongiven to the global dimension of the problem the more local and national levelactors will feel the irrelevance of their particular contribution to any solution –and this may increase the propensity for ‘free-riding’ on the necessary institutionbuilding. On the other hand, even if global regulatory structures can be put inplace, there is a high probability that there will be mistakes in designing theregulations and this may result in systemic failures on an enormous scale. Theregulations themselves are unlikely to be self-enforcing and will incur massivetransaction and monitoring costs that will limit their effectiveness in the contextof overwhelming incentives to free-ride or to engage in rent-seeking behaviourwithin the regulatory structure (Ostrom, 2009: 31).

From Ostrom’s point of view, while the very nature of the climate changeproblem precludes a fully decentralised approach, she maintains that thoughimperfect, polycentric alternatives emphasising not the global benefits ofadopting emissions reducing measures but those benefiting actors at the local,regional and national levels are the ones more likely to be successfully enactedand enforced. Within this context, Ostrom notes that at many different scales ofgovernance, measures are already being enacted that may contribute solutions tothe climate change dilemma without waiting for global action. At the local scale,these include anti-pollution measures to improve air quality and local healthoutcomes, congestion charging schemes for road use which reduce journey timeand contribute to lower emissions, and at a higher scale measures such as theEuropean Union’s carbon-trading regime (Ostrom, 2009: 16–22).

From an RPE perspective, however, beyond the relatively localised measuressuch as road pricing, the levels of decentralisation Ostrom endorses in this casemay themselves be too centralised to avoid large-scale errors resulting frombounded rationality and incentive compatibility constraints. When the units thatare ‘contracting up’ responsibilities are political jurisdictions and states that canwield coercive powers in a manner that blocks effective exit options, then thereare grounds to be very wary of such ‘solutions’.

One example here is the European Union emissions trading system. As aEuropean wide scheme, this provides little or no scope for learning via inter-jurisdictional competition and presents a massive principal–agent problem forthe hundreds of millions of citizens and energy consumers to monitor its designand enforcement. While it is too early to come to judgement on the eventualperformance of the programme, initial results are not encouraging. Researchreported in Helm (2010), for example, suggests that the European Union schemehas produced higher prices for European consumers, no reduction in CO2

emissions but significant anti-competitive benefits to incumbent energy firms.If such results were to continue, then it would not be obvious why takingmeasures to reduce CO2 emissions at the European Union level should be thought


preferable either to leaving matters entirely at the discretion of individual nationstates or indeed of not engaging in any kind of climate change policy beyondthose measures that might deliver purely local level environmental goods.

What is surprising about Ostrom’s reluctance to consider ‘doing nothing’and her support for measures such as European emissions trading is that herown framework offers little to suggest that state-driven schemes beyond thoseoperating at a localised level will be robust. Ostrom herself is scathing about someof the European Union’s other environmental policies – notably the CommonFisheries Policy (Ostrom, 2012). Yet, this policy could be considered as a classiccase where a mistaken decision to ‘contract up’ responsibilities to a higher levelhas placed both fishermen and the European Union citizenry in a scenario wherethey are unable to escape from what looks like a virtually irreversible decision.The case of fisheries is, of course, more telling from Ostrom’s standpoint becauseit is an area that her own research suggests is open to more decentralised formsof governance. Nonetheless, what the case shows is that there are risks fromcentralisation whenever those involved in the process of institution building arepolitical actors that can ‘lock’ their citizens into failing institutional structures –an analysis that is of relevance even when there are no decentralised alternatives.

Insofar as centralised state action has demonstrated benefits, Ostrom’sresearch tends to confine this to conflict resolution measures, offering thebackground rule of law that can stabilise expectations for local actors as theycraft their own solutions to collective action problems. A further ambiguityin the Ostromian framework here is the absence of principles to explicatewhat can prevent states that perform this necessary role from becoming athreat to predominantly bottom-up processes. There is, for example, little tosuggest in Ostrom’s work that democratic states are more likely to maintainthe conditions supporting endogenous rule formation than non-democraticalternatives (Mansbridge, 2010: 591). Institutions of majority rule offer noguarantees that regional or national majorities will not vote for measures thatimpinge on the property regimes developed by individuals and communitiesat a more local scale. What matters in Ostrom’s framework is maintainingan appropriate division of responsibility between different levels of decision-making – yet successful and unsuccessful attempts to maintain such divisionhave occurred in a variety of democratic and non-democratic contexts. It seems,therefore, to be a matter of historical accident whether the surrounding stateinstitutions work to support Ostromian structures or to undermine them.

Ostrom is, of course, hardly alone in lacking a fully developed theory ofhow to create and sustain the framework needed to support effective bottom-up institutions. Classical liberal political economy, for example, has a well-developed explanation of the potential robustness of private property, market-based institutions, as sketched in the opening section of this paper. What it lacks,however, is an account of how to create these institutions where they do not existand where they do, how to prevent those who achieve entrepreneurial success


from using state powers that may be necessary for law enforcement and thesupply of collective goods to entrench their own position via anti-competitiverent seeking.

In attempting to address these difficulties, two potential avenues consistentwith the RPE perspective suggest themselves. The first might be termed the‘anarchist solution’. On this account, since there is no convincing explanation ofhow central state institutions can overcome bounded rationality and incentivecompatibility in the provision of large-scale collective goods, attention shouldshift to avoiding all forms of such control. Working in a developing countriescontext, for example, Leeson (2007) suggests that when central state institutionsare vehicles for purely predatory purposes, developmental prospects may actuallybe enhanced by not having an apparatus of government in place. This conclusionreinforces that expounded by James Scott who suggests that for many in thedeveloping world ‘escaping from government’ might be preferable to living underthe auspices of an incompetent and/or predatory regime (Scott, 2009).

A second avenue of response might be termed the ‘conservative solution’.According to this view, in contexts where people live under tolerably functioningstate institutions – albeit owing to historical accidents – it would constitute anact of extreme rationalism to dismantle these institutions in the absence of anyfunctioning alternative. Although contemporary liberal market democracies maybe riddled with rent seeking and cronyism of various sorts, they function wellenough to have produced reasonably high levels of economic growth, combinedwith some protection for common-pool resources. This perspective might pointtowards an incremental removal of regulatory controls in areas where bottom-uprules have the potential to evolve. At the same time, however, it would be waryof creating new national or international structures of collective action that maygenerate systemic risks – even in the absence of bottom-up alternatives.

Both of the above perspectives seem consistent with an RPE approach thatrecognises the significance of ‘non-ideal’ conditions. Ostrom has provided acompelling explanation of common-pool problems and of the institutionalprocesses that may be best placed to address them. What she offers, however,is nonetheless a partial solution. Until it can be explained how the dangers thatarise whenever large-scale institutions of collective action are put in place canbe minimised, then one of the most important, though probably unwelcome,lessons to take from Ostrom’s work is that ‘no solution’ is sometimes the bestavailable option.

5. Conclusion

This paper has sought to situate Elinor Ostrom’s work on common-poolresources in the tradition of RPE. As a result of her emphasis on ‘real-world’constraints, Ostrom’s work provides grounds both for optimism and pessimism.On the one hand, it suggests that there may be much greater scope to address


common-pool problems effectively than was previously envisaged. On the otherhand, however, this paper has argued that a consistent emphasis on the problemscreated by limited knowledge and incentive compatibility suggests a category oflarge-scale collective action problems which may be intractable in character.If this analysis is accurate, then there is a need for a new research agenda thatexplores the potential mechanisms that people can adopt to cope in circumstanceswhere no robust ‘institutional solution’ is discernible.

References

Aldrich, J. (2010), ‘Elinor Ostrom and the “Just Right” Solution’, Public Choice, 143(3–4):269–273.

Aligica, P. and P. Boettke (2009), Challenging Institutional Analysis and Development,London: Routledge.

Aligica, P. and V. Tarko (2012), ‘Poly-centricity: From Polanyi to Ostrom and Beyond’,Governance, 25(2): 237–262.

Anderson, T. and P. Hill (1975), ‘The Evolution of Property Rights: A Study of the AmericanWest’, Journal of Law and Economics, 18(1): 163–179.

Anderson, T. and P. Hill (1983), ‘Privatising the Commons: An Improvement?’, SouthernEconomic Journal, 50(2): 438–450.

Anderson, T. and D. Leal (1991/2001), Free Market Environmentalism, New York: Palgrave.Baden, J. and R. Stroup (eds.) (1981), Bureaucracy versus the Environment, Ann Arbor, MI:

University of Michigan Press.Boettke, P. (1997), ‘Where Did Economics Go Wrong?’, Critical Review, 11(1): 11–64.Boettke, P., C. Coyne, and P. Leeson (2007), ‘Saving Government Failure Theory from Itself’,

Constitutional Political Economy, 18(2): 127–143.Boettke, P., C. Coyne, and P. Leeson (2011), ‘Quasi-market Failure’, Public Choice, 149(1–2):

209–224.Boettke, P. and P. Lesson (2004), ‘Liberalism, Socialism and Robust Political Economy’,

Journal of Markets and Morality, 7(1): 99–111.Coase, R. (1992), ‘The Institutional Structure of Production’, American Economic Review,

82(4): 713–719.Deacon, R. and M. Johnson (1985), Forestlands: Public and Private, Cambridge, MA:

Ballanger Publishing.Demsetz, H. (1969), ‘Information and Efficiency: Another Viewpoint’, Journal of Law and

Economics, 12(1): 1–22.Ehrenfield, D. (1972), Conserving Life on Earth, Oxford: Oxford University Press.Gigenrenzer, G. and R. Selten (2002), Bounded Rationality: The Adaptive Toolbox,

Cambridge, MA: MIT Press.Hardin, G. (1968), ‘The Tragedy of the Commons’, Science, 162: 1243–1248.Hasnas, J. (2009), ‘Two Theories of Environmental Regulation’, Social Philosophy and Policy,

26(2): 95–129.Hayek, F. A. (1948a), ‘Economics and Knowledge’, in Individualism and Economic Order,

Chicago, IL: University of Chicago Press.Hayek, F. A. (1948b), ‘The Use of Knowledge in Society’, in Individualism and Economic

Order, Chicago, IL: University of Chicago Press.


Helm, D. (2010), ‘Government Failure, Rent Seeking, and Capture: The Design of ClimateChange Policy’, Oxford Review of Economic Policy, 26(2): 182–196.

Friedman, J. (2006), ‘Taking Ignorance Seriously: Rejoinder to Critics’, Critical Review, 18(4):467–532.

Kurrild-Klitgaard, P. (2010), ‘Exit, Collective Action and Polycentric Political Systems’, PublicChoice, 143(3–4): 339–352.

Leeson, P. (2007), ‘Better-off Stateless: Somalia, Before and After Government Collapse’,Journal of Comparative Economics, 35(4): 689–710.

Leeson, P. and R. Subrick (2006), ‘Robust Political Economy’, Review of Austrian Economics,19(2): 107–111.

Mansbridge, J. (2010), ‘Contribution to Review Symposium “Beyond the Tragedy of theCommons”’, Perspectives on Politics, 8(2): 590–593.

McGinnis, M. (2005), ‘Beyond Individualism and Spontaneity: Comments on Peter Boettkeand Christopher Coyne’, Journal of Economic Behaviour and Organisation, 57(2):167–172.

McKean, M. and E. Ostrom (1995), ‘Common Property Regimes in the Forest: Just a Relicfrom the Past?’, Unasylva 46(180): 3–15.

O’Driscoll, G. and M. Rizzo (1996), The Economics of Time and Ignorance, London:Routledge.

Ostrom, E. (1990), Governing the Commons: The Evolution of Institutions for CollectiveAction, Cambridge: Cambridge University Press.

Ostrom, V. (1999), ‘Polycentricity Part 1’, in M. McGinnis (ed.), Polycentricity and LocalPublic Economies (chapter 2), Ann Arbor, MI: University of Michigan Press.

Ostrom, E. (2006), Understanding Institutional Diversity, Princeton, NJ: Princeton UniversityPress.

Ostrom, E. (2009), ‘A Polycentric Approach for Coping with Climate Change’, Working Paper5095, Washington, DC: World Bank.

Ostrom, E. (2012), The Future of the Commons: Beyond Market Failure and GovernmentRegulation, London: Institute of Economic Affairs.

Ostrom, E. and R. Parks (1999), ‘Neither Gargantua Nor the Land of Lilliputs: Conjectureson Mixed Systems of Metropolitan Organisation’, in M. McGinnis (ed.), Polycentricityand Local Public Economies, Ann Arbor, MI: University of Michigan Press.

Scott, J. (2009), The Art of Not Being Governed: An Anarchist History of Upland South EastAsia, New Haven, CT: Yale University Press.

Stiglitz, J. (1994), Whither Socialism? Cambridge, MA: MIT Press.Von Weizsacker, E. U., O. Young, and M. Finger (1995), The Limits to Privatisation, London:

Earthscan.

elinor ostrom and the robust political economy of common-pool resources

Documents