4.1 Formation of Property Rights

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To those immersed in them, the political struggles over Internet governance may seem historically unique and too complex to categorize. But in hindsight the battles over the root fall unambiguously into a specific class of social phenomena: the formation of property rights. They are an example of what happens when a new resource is created or discovered and conflicts arise among individuals attempting to appropriate its value, forcing the affected community to define rules governing the economic exploitation of the resource. Gary Libecap (1989) calls this situation 'contracting for property rights.' Contracting is his term for the bargaining that takes place among private claimants 'to adopt or to change group rules and customs regarding the allocation and use of property' (4). Ostrom, Gardner, and Walker (1994) describe essentially the same process as a 'collective action situation' that prompts people to devise 'institutional arrangements to regulate the use of resource systems shared with others' (23).

Contracting for property rights can be unpacked into three sequentially related parts: endowment, appropriation, and institutionalization.

Endowment is the development of new demand conditions that lend substantial value to a resource. ^{[1 ]}Appropriation refers to attempts by private actors to exploit the resource or establish claims to parts of it. If appropriation activity results in a significant number of mutually exclusive uses and conflicting claims, a need for formal property rights or governance rules is created. Institutionalization, the third stage in the sequence, is the working out of a set of rules or rights definitions that resolve the conflicts and provide a settled (but not necessarily efficient or just) basis for the exploitation of the resource. In developed societies, institutionalization processes typically take the form of litigation, lobbying, legislation, private bargaining, or the formation of new rule-making organizations. Most of the empirical literature on this topic examines the emergence of institutions governing shared natural resources, such as land claims, oil pools, fishing rights, groundwater basins, or mining rights. But the theory can be applied readily to technically constructed resources such as name and number spaces.

Part II of the book is based on this three-part sequence. It develops a thick historical narrative about the evolution of the root and the development and resolution of governance conflicts. The narrative begins with the growth and commercialization of the Internet and shows how it endowed the domain name space with value. Next, it examines how the governance wars emerged as businesses and individuals clashed over attempts to appropriate the name and number spaces; these conflicts were fueled by fundamental ambiguities about who owned the resource space. The narrative then moves to an analysis of the formation and structure of new property rights institutions, focusing on ICANN and its supporting organizations, its domain name dispute resolution procedure, and its quest for legitimacy.

There are several reasons why that process is worthy of sustained attention. The institutionalization of the root produced an institutional innovation rather than incremental modifications or adaptations of existing institutions. It was the product of a form of transnational collective action more or less outside the framework of the nation-state and the intergovernmental organizations that nation-states typically use to resolve such problems. The institutionalization of the Internet root thus raises important questions about the relationship between technology and institutional change, the role of nation-states, and the tendency of the Internet to globalize institutions. Also, the particular resource in which property rights are being established, global identifiers, raises a host of important and sometimes perplexing policy issues. These pertain not only to the relationship between technical assignment processes and trademark rights but also to the very nature of identity in cyberspace and the role of the state (or some other collective authority) in controlling the delegation and use of identifiers.

^{[1 ]}Economists normally use the term endowment in a static sense to describe a given state of resource distribution. When economists use the term in this way, the specific endowment is exogenous to whatever it is they are trying to explain. I am using endowment in a dynamic and historical sense, to describe something that happens to a resource.

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