Property Rights and Collective Action in Natural Resources with Application to Mexico

Lecture 1: Introduction to the political economy of natural resources

Lecture 2: Theories of collective action, cooperation, and common property

Lecture 3: Principal-agent analysis and institutional organization

Lecture 4: Incomplete contracts with application to Mexico

Lecture 5: A political economy model

Lecture 6: Power and the distribution of benefits with application to Mexico

Lecture 7: Problems with empirical measurement with application to Mexico

Lecture 8: Beyond economics: An interdisciplinary perspective

Actors in a productive organization

• Internal governance of common property forestry– Logic of community– Logic of market

• Today: logic of market• Community as a productive organization:

– Workers– Managers– Decision makers– Stakeholders– The market

Principal – agency theory and organizational design

• Useful concepts:– Measurability of inputs– Asymmetric information– Enforcement and accountability– Separation of ownership and control– Contingencies in production

Principal - Agency Basics

• Hart and Holmstrom (1987). “Theory of Contracts”. Advances in Economic Theory (T. Bewley ed.)

• 2 economic actors:– Principal– Agent

• Agent provides Principal with an input.

• Problem: measurability of the input.

Asymmetric information

• “I know something you do not.”

• Principal: uninformed party

• Agent: informed party whose information is relevant to common welfare

Imperfect signals

• Agent performs task and chooses effort level = t• Personal cost to Agent = C(t)• Benefit to Principal = B(t)• Information generated by t:

x = u(t) + , ~ N(0, 2)

• u(t) is a reliable signal is a random noise• Agent’s compensation is based on x: w(x)

Tradeoff of Risk and Incentives

• Principal usually risk neutral• Agent usually risk averse• Tradeoff:

– Fixed wage: no risk to agent, Principal bears all risk, less incentives for Agent.

– Incentive scheme: more incentives for Agent, Agent bears more risk:

UP = R(x) – w(x), where R = revenue

UA = V(w(x)) – C(t), where V is concave

Moral Hazard

Tendency of imperfectly monitored person to engage in “undesirable behavior” (POV of P)

• A’s objectives aligned differently than P’s• Opportunistic behavior; happens when:

– A takes decision that affects P and A– P observes outcome and outcome is imperfect signal;

A’s utility function is private information– A’s decisions are not Pareto optimal

Productive organizations

• Contractual relations balance interests into an equilibrium– Balance risk sharing and providing incentives– Bring objectives into alignment– Many ways to do this.

• Firm as nexus of contracts among various actors

Decision Monitors:Ratify decisionsMonitor decisions

Decision Managers:Generate proposalsImplement decisions

Residual Risk Bearers:Reap profitTake loss

Actors in Productive Organization

Political-Economic System

Green=community; Yellow=state; Blue=Private

Example: Mexican Stumpage Community

ASAMBLEAGENERAL

SERVICIOS TECNICOS

FORESTALES

JEFE DE MONTE

DOCUMENTADOR

COMISARIADO CONSEJO DEVIGILANCIA

Private firm

SEMARNAT

PROFEPA

Example: German Forestry Management

Mayor/council

Municipality citizens

State Forest Office

State workers

State Managers

Decision Monitors:GAJVAdvisory councilsNGOsSemarnatProfepa

Decision Managers:ForestersCBCGeneral managerJefe de Monte/PatioDocumenter

Risk bearers:Community membersOutside private firms

Mexican Agrarian Communities

Work groups and individual level organization (survey sample)

Durango

N=28

Michoacan

N=13

Work groups 5 (post-92) 1 (pre-92)

Individual 2 (post-92) 8* (7 pre-92; 1 post-92)*needs check

Work groups

• Peter Taylor (2002)

• Frustration and inefficiency of old system

• Takes operational decisions out of GA

• CBC does not manage funds

• “More transparent”

• “Broadens participation”

• “Distributes more fairly”

Monitors:State forestry officeMayor/CouncilForest CouncilMunicipal SupervisionAuditors Certifiers

Managers:Statemunicipal official private managerprivate ranger

Risk bearers:Municipality

German Municipalities

Shared Issues

• Both economic and political organizations combined into one governance system

• Trends: – Germany: moving to more local control– Mexico: enhancing local management

• Challenges for both:– Decision control function– Accessing expertise

Ideas from Agency Theory

• Risk bearing ability

• Internal control

• External control

• Agent signaling

• Agent securities

• “Hard” incentives

• “Soft” incentives

Holmstrom and Milgrom (1991)

• Job design to enhance efficiency

• Based on measurement costs:– Task 1 is measurable– Task 2 is not

• Examples: – Grade school education: basic skill and test

scores v. higher level thinking– Output and care for machines

Holmstrom and Milgrom (1991)

• Can jobs be separated?• If not, pay fixed wage if:

– Too difficult to measure other task– Task competes with agent’s time– Task increases opportunity cost of other task– Example: pay fixed salary/wage to teachers

• With application to Mexico (WAM): Can jobs be separated?– Political v. technical functions

Manne (1965)

• Is there market for managerial control?• Managerial control is a valuable asset.• Can you market it? • Managers lack incentive for corporate

control market• Merger justifications:

1. Bankruptcy2. Economics of scale3. Manne: “Protect shareholders” (risk bearers)

Manne (1965)

• Share price and managerial efficiency positively correlated

• If low takeover potential• Merger is one way to takeover • Overcomes free rider problem among stakeholders• Control premium must be paid• Mergers protect shareholders who do not have a

controlling interest• WAM: Is there a market for control in communities?

– Logic of community v. logic of market

Hirschman (1970)

• Exit: – vote with feet– But where do you go (exit options)?

• Voice: – dissent, complain– But does anyone listen?

• Loyalty: – how fast you leave, how long you stay

Hirschman (1970)

• Examples:– Nigerian railway: exit; no voice– Vietnam War and US officials: no exit, ineffective

voice

• Need to analyze:– Most likely client response– Most likely organizational response

• Need interplay of voice and exit to maintain quality of organization

• WAM

Cooperatives and communities

• Residual claims exchangeable? – If not, control features limited

• Who performs control functions?:– E.g. is board of directors restricted to set of

users? If so, lessens access to diverse expertise

• Lending?

Conclusions

• “Community” in Mexico as a productive organization

• Principal-agent theory as a tool– Tells us about optimal incentives schemes– How develop monitoring and management

roles?

Limitations of Principal-Agent Theory

• Does not inform us about the organizational form which will come about.

• What are boundaries of firm?

• Are contracts complete?

• Role of power and influence

• Misses the social context of property rights