4.4 Institutionalization

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Institutionalization occurs when claimants attempt to resolve appropriation conflicts through collective action. The most relevant empirical literature on this process focuses on the privatization of common pool resources. Common pool resources are asset stocks that are unowned or collectively owned. If the resource, such as a village grazing field, is collectively owned, units of the resource are open to appropriation by any member of the group. If it is unowned, it is open to appropriation by any individual that comes along.

As demand intensifies and the number of appropriators grows, common property arrangements tend to break down. The absence of formal, exclusive property rights or enforceable rules governing appropriation leads to overdevelopment and exhaustion of the resource. Under common pool conditions, appropriators have an incentive to extract as much as they can from the common pool immediately, for if they restrain their withdrawal of resource units, they will simply lose out to others who do not. Common pool conditions thus tend to foster a race to appropriate, which in turn encourages costly and duplicative investments in extraction equipment. Readers may recognize in this a variant of the familiar 'tragedy of the commons' story.

Technologically endowed resources may or may not possess common pool characteristics. Broadcast frequencies did; for a time, anyone who applied could obtain a license from the Commerce Department and broadcast signals regardless of their impact on other stations. The early stages of satellite communication also produced common pool conditions, because any country with launch capabilities could occupy a satellite orbit slot at will. The integrated circuit, on the other hand, was a revolutionary invention but did not directly create any interesting new institutional issues. The design and production methods could be patented, and thus fit into an existing property rights system. The chips themselves and the materials needed to make them could be owned and traded like other physical objects.

4.4.1 Political Constraints on Institutional Change

Unregulated appropriation can create huge economic losses. ^{[8 ]}Defining formal property rights or governance institutions can make society as a whole better off. But institutional change will not come about automatically simply because it is socially beneficial. As North (1981; 1990) and others have argued, economic institutions that are manifestly unproductive and dysfunctional do come into being and often remain in place for a long time. Most institutional economists now reject the view that the formation of property rights is guided by a kind of natural selection that ensures that inefficient institutions are eliminated and only good ones survive.

What then does social science have to say about the institutionalization process? Recall that it is political and legal processes that determine how property rights are assigned. Because of the intimate interdependence between the assignment of property rights and the distribution of wealth, any significant change in the definition of property rights is bound to produce winners and losers. Groups that would be made worse off by a proposed new property regime will resist it politically, and may hold enough power to prevent change or to lobby for an alternative regime more suited to their interests. ^{[9 ]}Political conflict over the distribution of wealth provides the controlling constraint on the creation or redefinition of property rights.

Libecap (1989) demonstrates that political bargaining over wealth distribution issues is the chief determinant of why there is such variety in property institutions, and why they can settle upon and maintain economically inefficient forms. The configuration of political power at any given time will be different, and the influence and level of organization of the various groups involved in contracting for property rights will vary widely. Drawing on historical case studies, he identifies several structural constants that will influence the outcome of the contracting process (21-26). These are worth recounting.

One significant structural variable is the size of the expected gains from institutional change. As a rule, the larger the expected aggregate gains from institutional change, the more likely it is that politicians will be able to devise a share arrangement that will win the consensus of the bargaining parties. Another important factor is the number and heterogeneity of bargaining parties. The larger the number of stakeholders involved in the contracting process, the more difficult it will be to reach an agreement. A heterogeneous set of bargaining parties also raises transaction costs, making it more difficult to achieve a stable, politically effective coalition. A third factor is the concentration of the current and proposed share distribution. Assuming a reasonably participatory political process, property arrangements that foster extreme concentrations of wealth are likely to be less successful in the political process than those that distribute wealth more broadly. Finally, there are 'information problems.' Uncertainty about the valuation of individual assets under current and proposed property rights regimes can increase the difficulty of coming to an agreement on share adjustments or compensation.

These factors prove to be useful in interpreting the history of Internet governance.

4.4.2 Property Rights and International Regimes

Institutions and rules are agreed upon and enforced by collective units. Most of the organizations that define, adjudicate, and enforce property rights and rules-courts, legislatures, regulatory agencies, and so on-are territorial in jurisdiction and derive their authority and legitimacy from sovereign national governments. Even the customs and norms that informally constrain uses of property tend to vary on a regional basis, and can be aligned (with varying degrees of success) with governmental jurisdictions. Thus, most of the theory of institutional economics takes the nationstate as the basic unit of analysis.

But a growing part of economic and social activity crosses national boundaries. Because there is no world government, contracting for property rights in these spaces requires collective action among sovereign nation-states. The rights and rules defined by agreement among national governments to institutionalize a specific sector are called international regimes (Young 1989). There have been several reasonably successful attempts to directly link property rights theory with international regime theory. Richards (1999), for example, describes international regimes as institutions that assign property rights in international markets. The national politicians who forge international institutions will favor arrangements that maximize their political support by benefiting important domestic constituents. Richards's theory also emphasizes the primacy of political bargaining over economic efficiency in determining the features of specific property regimes. Politicians assign rights in a way that transfers wealth to favored market participants, or they create international institutional arrangements that increase the amount of wealth available for domestic redistribution (3-4).

Applying this theory to the Internet and its name and number spaces is a challenging task. Although the Internet resources are global in scope, as it turned out, the collectivity involved in the institutionalization of the domain name system was not a group of nation-states bargaining as peers, either multilaterally or within the forum of an international treaty organization. Instead, a new, ostensibly private sector organization was created that would bring together the various stakeholders to formulate ' consensus' policies. There were ideological as well as political and economic reasons for not turning the institutional problem over to traditional intergovernmental institutions. Internet governance thus led to the formation of a new arena of collective action. That process did, however, have to interact with the existing international system, and national politicians and international organizations played an important role in shaping the governance process.

^{[8 ]}For example, Libecap (1989, 94) cites evidence from the time period 1910- 1914 that common pool losses in the oil industry amounted to 25 percent of the total value of production. Estimated oil recovery rates of only 20 to 25 percent were achieved with competitive extraction, whereas recovery rates of 85 to 90 percent were thought possible with controlled withdrawal.

^{[9 ]}It should be noted that 'gains' and 'losses' are subjective constructs. In many cases, the true economic impact of property rights changes cannot be foreseen. Industry lobbyists may fight against some regulatory or legal change only to discover that in the longer run they have benefited from new opportunities or conditions created by the change. The Motion Picture Association of America, for example, attempted to ban the video cassette recorder as a threat to copyright protection, but now motion picture producers make more profit from videotape rental and purchase than from theatrical releases. Political bargaining over property rights, however, tends to be driven by short-term extrapolations of the expected gains and losses of deviating from current practices.

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