Chapter 4: The Root and Institutional Change: Analytical Framework

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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.

2. Property rights economics is a branch of institutional economics. The theory draws on classical political economy, neoclassical microeconomics, transaction cost economics, institutionalism, and noncooperative game theory. For a thorough exploration of its components, see Furubotn and Richter (1997). Rutherford's (1994) contrast of the 'old' and 'new' institutionalism is also a useful summary of the methods and theories of institutional economics. Ostrom, Gardner, and Walker (1994, 25-26), provide a summary of what they call institutional analysis and development literature.

3. A review of research on the economics of property rights by DeAlessi (1980) concludes, 'The effects of alternate systems of property rights on behavior, and welfare, are substantial and pervasive' (40).

4. The definition of transaction costs also includes costs associated with the contractual transfer of property rights, such as search costs, expenditures on negotiation, and the costs of monitoring and enforcing contracts.

5. Ostrom (1990) explores some of these cases, showing how collective action can establish and enforce rules governing access to and use of the shared resource. These cooperative property regimes may succeed by sharing some of the monitoring and enforcement costs, and by eliminating the costs created by the need to define and measure individual claims. But they also raise some of the classic problems associated with collective action, such as free-rider problems and other kinds of opportunistic behaviors that occur when the incentives of individual actors diverge from the interests of the group. Ostrom sees this as a problem that can be overcome with the appropriate institutional design.

6. The new institutional economics does not afford any special attention to the role of technology in institutional change. In contrast, Rutherford (1994) notes that the older institutionalist literature 'contains many suggestive ideas on . . . the unintended impact on institutions of intentionally introduced alterations to the technical and material means through which individuals make their living' (180). See Bush (1987) for an overview.

7. 'Because of the scarcity of radio frequencies, the Government is permitted to put restraints on licensees in favor of others whose views should be expressed on this unique medium.' U.S. Supreme Court, Red Lion Broadcasting v. FCC, 395 U.S. 367 (1969). See also B. Schmidt, Jr., Freedom of the Press vs. Public Access (New York: Praeger, 1976) for a characterization of broadcasters as 'public trustees' because of their privileged use of scarce spectrum rights.

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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