Contracting and the Commons: Linking the Insights of Gary Libecap and Elinor Ostrom

Abstract

In 2009, Elinor Ostrom won the Noble memorial prize in economics sciences for, in the words of the prize committee, “demonstrating how local property can be successfully managed by local commons without any regulation by central authorities or privatization.” This account of Ostrom’s contribution focuses on how her work presented a “third way” of governing the commons in direct contrast to the two solutions suggested by Garrett Hardin. In critiquing Hardin’s view, Ostrom studied many cases in which resource users, in the presence of weak, dysfunctional, or nonexistent governments, created resilient institutions to manage resource use. In these settings, she demonstrated that self-regulating common-pool resource (CPR) governance can take the place of other institutional arrangements more familiar to economists and political scientists. 

Because many of Ostrom’s groundbreaking findings emerged from studies of local, self-sustaining governance built on informal norms, economists have tended to view her work as less relevant to governance questions related to industrial resource use in developed countries where formal property rights, regulation, and contracts also play a role. One clear exception is found in the work of economist Gary Libecap, who examines settings where the ultimate governance structure is either a contract between resource users or the creation of new formal property rights. Libecap’s approach treats the outcome of property right negotiations as a collective action problem, and in this chapter, we explore how his approach complements and extends Ostrom’s work. We also explore key areas of divergence between Libecap, and property rights scholars generally, and the work of Ostrom and other commons scholars—unsurprising given Ostrom’s skepticism of property right solutions as a panacea.

Starting with Arthur Cecil Pigou, economists have analyzed natural and environmental resource problems against the benchmark of a social planner making optimal decisions. In this view, idealized solutions are clear, and the realities of if, or how, they are implemented are a secondary concern. Ostrom and Libecap turn this on its head, studying as their primary research objective how users deal with factors that cause coordination and collective action problems, rather than treating these problems as obstacles to achieving some desired optimal outcome. Both Libecap and Ostrom see the world through the lens of collective action and individual incentives. While Ostrom and her colleagues looked broadly at collective governance, Libecap found parallels between CPR governance and collective action through formal contractual agreements: group characteristics, information problems, and the proportionality of resource distributions being key determinants of success. These results build on Ostrom’s work and provide important insight into contemporary environmental and natural resource challenges, where the same factors that cause difficulties in collective action and coordination prevent the adoption of optimal regulatory solutions. 

In comparing Libecap and Ostrom, we acknowledge that both authors have large bodies of work grounded in the empirical realities of numerous cases. It is difficult to fully generalize each author’s work, and that is not our goal. Instead, we use an illustrative selection of their writings and those of related scholars to make two key arguments: (1) Ostrom’s work is applicable to the study of property rights and regulation, as well as self-governing regimes; and (2) the type of property rights and contracting results Libecap discussed, under some circumstances, move resource users toward effective CPR governance. We first provide examples of how the study of collective action in the work of both authors yields important insights for both property rights and contracting. We then focus on one apparent area of divergence: Libecap’s emphasis of the effectiveness of property rights in contrast to Ostrom’s emphasis on trust. We argue that trust and clearly defined property rights serve similar functions in some cases, and that because of this they can be viewed as partial substitutes.

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