Download Chopra

Role of Non-Market Resource
Allocation : Theory and Evidence
Kanchan Chopra
Institute of Economic Growth
Delhi, India
Outline of the talk:
• The Theory: What are NMRAMs; how do they
relate to economic behavior of humans as part of
social systems
• The Context: The management and use of natural
resources
• Empirical Evidence : we shall use empirical
studies from different parts of the world to
illustrate.
• Finally, Some observations on evolutionary
theorizing in Economics
Four In-depth Studies
– Initiating and Sustaining a New Institution of
Resource Management
– Evolution of Social Norms in CPR use
– Pollution Control and sub-Coalitions
– Extraction of Timber and Biodiversity Levels
– in multi-species Forests
What are NMRAMs:
• Social Norms, Beliefs
• Laws
• Institutions
Economic Activity is embedded
in social institutions
• The understanding of this can make a great
difference to the interpretation of formal theorems
in Economics.
• First Fundamental theorem of Welfare
economics:“If individuals maximize their own
utility, then (given that certain technical conditions
are satisfied), the competitive equilibrium that
arises is always Pareto-optimal. “
An Alternative Interpretation
• Individuals are free to choose any point from
within their budget sets.
• In fact their freedom is very restricted. An
alternative interpretation of the fundamental
theorem is:
• “Society attains optimality if individual choice is
severely restricted to points within the budget set”.
• There is a number of strategies available out there,
far more than the theorem takes into account.
Three kinds of Social Norms
• Rationality limiting social norms
• Preference Changing Norms
• Equilibrium Selection Norms
Rationality limiting social norms
• This kind of norm implies that the feasible set of
alternatives is not defined only by technological or
budgetary feasibility: the existence of norms limits
the domain over which the rationality calculus can
be applied
• Can this be interpreted to mean that a normatively
infeasible option is described as one that gives
very low utility?Redefine the utility function
• Doing so invariably and all the time runs the risk
of reducing utility theory to a tautology
Preference Changing Norms:
• Main reason for recognizing this as a
separate conceptual category is that it
examines how preferences are formed
• Such understanding is particularly
significant for natural resource management
and use.
From utility limiting to
preference changing norms
• Example of a norm: a more general one: the
example of “being on unemployment benefit” or
“”welfare” .
• There is a lower utility from income obtained in
this manner, presumably because of the stigma
attached to it. However, the larger the number of
people who are on it, the lesser the stigma.
• The amount of unemployment in the economy (a
macro level phenomenon) can cause change in
individual preferences.
Preference changing norms and
multiple equilibria
• This raises the possibility of multiple equilibria in
an economy.
• A high and a low employment can both be
equilibria.
• The bottom line is that preferences are not
primitives but depend on the economy wideoutput.
• Proved formally by Lindbeck et. al in QJE (1999)
From the theory of club goods
and associations
• Value of the Membership of an Association
depends on who the others are who are part
of that association. If this membership were
allocated by the price rule, its value would
be a diminished one: theory of club goods
• The above implies that equilibrium may
exist for a profit maximizing entrepreneur
with excess demand.
Discounting the future
• How individuals discount the future in
resource dependent economies is a
preference changing norm. If the number of
people having low rates of discount is large,
others also fall in line
Equilibrium Selecting Norms
• Two states of the world are possible and the norm
acts as a “co-ordination device”.
• It is in people’s interest also to follow a norm:
drive on one side of the road.
• It is not always in everyone's interest to follow the
norm. Stop sign rule or the speeding rule is
broken more often than the one mentioned earlier.
Equilibrium selection norms
These are useful when:
– When the strategic behaviour of others is not known
– When they lead to self-organisation of systems: these
may encourage different levels of stability at different
scales: Akerloff (1976) on the economics of the caste
system, the rat race etc
– When there exists great uncertainity with respect to
eco-system characteristics: semi-arid regions; drought
prone areas and other such regions
Law and Economics
• Laws:the usual understanding is that law changes
the set of options available to an individual and
the pay-off from these actions.
• This would be correct if “law” were a game
played by only the non-governmental individuals
in a society
• the implementers of the law are also individuals
with their own motivations, aspirations: they are
also players.
Law and Human Behavior
• Law and the state are self-organising outcomes,
interpreted as a set of Nash-equilibrium outcomes
• Laws help in choosing from multiple outcomes by
creating “a focal point”of reference
• This influences the outcome by creating
expectations in peoples' minds about others'
behavior
• Law’s empire is founded on beliefs.
Core Theorems
• Core Theorem: Whatever behavior and outcomes
in society are legally enforceable are also
enforceable through social norms.
The above can be divided into two corollaries:
• What can be achieved through the law can be
achieved without the law
• If a certain outcome is not an equilibrium of the
economy, no law can achieve it
• Basu, K. Prelude to Political Economy 2000
NMRAMs: An Evaluation of
their role
• Illustrate the role of norms in this evolution
through two in-depth studies which highlight their
role within traditional economic models of intertemporal maximisation
• Effect of interaction of market and non-market
resource allocation mechanisms in the context of
timber extraction and bio-diversity interlinkages
• Use of Evolutionary game theoryl
• Laws on Pollution Control: what they can do and
what they cannot?
Definitions
• Common Pool Resource: Any resource to which
multiple users have joint access
• Common Property Resource: A property rights
regime with well-defined rules of management,
use, entry and exit: a la Ostrom
• The latter is in the center of the continuum the two
extremes of which are state and private property.
I.Resource Management : Land
Pooling
• Operationalisation of resource management
and use for development requires a built-in
institutional framework that can make it
implementable.
• Deriving the conditions for sustainability is
not enough. The rules that make it work
need to be laid down.
• The above is illustrated from a model based on
community land and labour pooling
• Pre-Existing Condition:
 Private Ownership of Land did not yield full use
due to scale diseconomies and migration of
owners
Degraded private land could be Pooled
• Pooling and withdrawal of land resources is
permitted in the process
• Leadership to initiate change is available
Model of evolution of the
institution
• Model: N(0): Number of individuals in
initial period
• L(0): Land to be pooled in initial period
• K(0): An initial one time investment
•
W, wage rate<W*the market rate
• Income Y(t) = f[ K(t),N(t),L(t)]
• Surplus income after paying stipendary wage is
[Y-WN]
• This is divided into three parts,the return to pooled
labour, capital and land
• The steady state values of N(t), L(t) and N(t) over
time found. Required land-man ratios and initial
levels of capital stock are also found. Three points
in this trajectory are of interest
Institutional factors in land pooling:
Stable and Unstable equilibria
r*L
C
B
r(Y-wN)
A
L(0)
L(t)
L*
Nature of the Process
– The initial starting point, where L(0) , the land put
together has to be more than a minimum L(0).
– The marginal conditions for sustainability are limits on
the values of the distributive parameters and their being
higher than opportunity cost.
– The initial point, when interpreted is found to have
characteristics of an unstable equilibrium.
– The difference between L(0) going down to zero and
the process getting off to a start up is made by factors
such as :leadership, trust in the rule re-enforcing
mechanisms etc.
– With similar levels of opportunity costs, the process
gets initiated at one place, at another it does not.
Model Characteristics
• Taken together, the steady state conditions indicate
that in the long run, the levels of capital stock,
land pooled, extent of participation and resulting
income gains depend on the sharing mechanism
and vice-versa.
• This indeterminateness can be resolved only
through a process of negotiation. However, too
many adjustments in the sharing mechanisms are
also not conducive to the on-going and
strengthening of the process.
• Chopra and Kadekodi (1999), Operationalising
Sustainable Development.
Lessons for NMRAMs
• The essential moral of the story is that in setting
up non-market resource allocation mechanisms
such as participation, the nature of the movement
towards equilibrium depends on rules set up for
distribution of gains and the element of trust in the
long run continuation of these rules.
• Further, similar ranges of values of the threat
levels of significant variables may lead to different
outcomes for the sustainability of the process
depending on what these process related outcomes
are.
II. CPR Management: Theory
and Empirical Evidence
• The received wisdom on CPR management
maintains that it has a unique equilibrium which is
inefficient with higher levels of extraction than the
efficient equilibrium but implies lower levels of
extraction than open access.
• There will be over extraction
• But empirical evidence shows that some
communities do control extraction
• An evolutionary dynamics approach helps us to
see why
An evolutionary theory of
individual behavior
• Assume two levels of effort put in by individuals
to extract from CPRs: low and high: Effort: X
• Players adopting high effort: defectors: Adopting
low effort: May be cooperators or enforcers who
sanction defectors
• Xe<Xl< Xh< Xn
• Three kinds of actors:, defectors, enforcers and
cooperators I=1,2,3 with proportion S in the
population
• Pay-off (Pi)differentials exert evolutionary
pressure on the population. Replicator dynamics
Further conditions
• Assume that if a person punishes another, he
incurs a cost, c and inflicts a loss, l on the other.
• At an equilibrium point, all surviving strategies
earn equal pay-offs
• The steady state in which defectors alone are
present is called the D-equilibrium and the steady
state in which no defectors are present is the C-E
equilibrium.
Characteristics of equilibrium
states
• The nature of pay-offs to the three kinds of actors
ensures that a state in which all three are present
cannot be an equilibrium point since enforcers do
worse than co-operators
• A state consisting only of enforcers and defectors
can also not be an equilibrium since the latter do
better
Characteristics of the equilibria
• In the simple case (in which resource dynamics
over time are not taken into account):
o Defector equilibrium, which involves noncooperative resource allocation, is asymptotically
stable for all parameter values
o For some values of the loss of individual n, the
subset of stable points in the C-E continuum
constitute a non-empty interval
o This last implies that there exists a set S of stable
states consisting of co-operators and enforcers
Implications
• CE equilibria of the CPR game represent a
departure from fully self-interested
behaviour
• The result establishes that there are
conditions under which such a norm guided
population will be immune from invasion
by a small group of self interested players
Other results
• The size of the set of stable states: length of the set
is independent of the cost of sanctioning
•
However the size of the basin of attraction
depends on the cost of sanctioning
• A temporary change in pay-offs can bring about
irreversible change in behaviour: if it moves to Dequilibrium, that is asymptotically stable
Implications and links with
empirical studies
• Explains the continued existence of cooperative
management of CPRs in some conditions
• Also points towards its fragile nature
• As long as model parameters ensure that
population composition remain within the basin of
attraction of the set of stable states, cooperation
shall last.
• Sethi and Somanathan AER, 1994.
III Law and its enforcement
• Water pollution by industry is an important issue
in a large number of countries
• Laws exist but typically they are not implemented
due to collusion between industry and
bureaucracy.
• Laws create a “focal point” and changes peoples
expectations of others’ behaviour: if those
expectations are not fulfilled, they do not change
anything
An analysis of law, coalitions and
water pollution abatement
• Law( in the form of a per unit tax on effluent of
level t) backed up by social norms creates a dent
on pollution through the emergence of coalitions
of interested parties
• Stakeholders: industry, bureaucracy,
(implementers), people affected by pollution of
ground water (say) and elected representatives
Coalitions of Interest Groups
• A model is set up with pay-off to each party in the
presence of:
• Cost of political organization,c and varying
probability with which people perceive damages,
p
• Over reporting of environmental quality (EQ)by
implementers of the law results in a payment from
industry, b
• An under-reporting of EQ attracts a penalty for
implementers, urp
Coalitions of interest groups
• Strategic Behaviour of two coalitions (industry
and implementers on one side and people and
courts/ their representatives) is modelled in the
form of reaction functions with different
characteristics to obtain the level of environmental
quality under different conditions
• Some results:
• Preposition 1:When penalties on industry and
implementers are raised, environmental quality for
given level of cost of political activity increases
Results from industrial pollution
model for collective action
• Proposition 2: Optimal Environmental quality
with a positive cost of political activity is lower
than environmental quality with zero costs of
collective action.
• Any laws or interventions initiate expectations,
change the ground rules and the outcome depends
on different factors
• Political Activity can produce the same result as a
law introduced by a benevolent government
• Murty (1995)
IV Market and non-market
mechanisms: Resource extraction
• In a large number of situations in
developing countries, both kinds of
mechanisms coexist, often impacting the
same resource
• Forests are exploited within a large variety
of regimes; Timber extraction is driven by
the market; a range of non-timber products
is exploited within non-market regimes
Timber Extraction and Forest
Biodiversity
• This co-existence of different regimes has
implications for relative levels of extraction
of the two products and in the long run, the
biodiversity of the stock of the resource
• Illustrated using the example of timber
extraction and forest biodiversity
Bio-diversity Indices: A
digression
• Alternative indices capture different aspects of
biodiversity
• Species richness and species diversity indices:
treat all species as equally significant
• Species Area Relationships: Island Biogeography
Theory
• Functional Measures: Function for the Ecosystem: taxic and functional diversity
Functionality in relation to
human use: Bio-Economic
Indices of diversity
• These are measures with reference to
human use
• Use of forests for timber, a commodity with
well defined markets: directed at one
commodity
• Non-timber forest product extraction is a
diversity based use:bio-economic indices
capture this diversity
Bio-economic Diversity Indices
• These are product diversity based: related to the
use value of forests
• Weighted by value: as measured by market price
or otherwise
• An year wise index weighted bymarket prices for
timber and value determined outside of direct
markets for non-timber
• Index ranges from 0 to 1 and is inversely related to
biodiversity levels
The model
• Timber extraction is driven by market price
and forests have been managed
“sustainably”for timber: not for other
products and services
• Start from the simple Gordon-Schaeffer
Model: Y= f(E,X)
Y: extraction E: Effort X: stock of timber
The Model Continued
• Xdot = rX(1-X/K)-qEX where Xdot= change in
stock at a given time, r: regeneration rate, q:
coefficient depicting availability of timber species
• With Xdot = 0 for sustainable management for
timber, Y=qEK(1-qE/r)
• We introduce two modifications: Biodiversity
Index B and ecological feature of forests as
measured by the ratio of natural forests to
plantation forests
The Model continued
• With the two new variables,
Extraction Y=qKBE(1+eW-qBE/r)
• Defining extraction per unit effort as U
(Y/BE), we get an expression for Udot/U
• Reduced form of the equation estimated
using 25 years time series data
Tentative Results
• In the model without B and W, extraction is
impacted by effort but explanatory power is low
• A rising trend in extraction is accompanied with
decreased biodiversity
• Increased biodiversity implies a lower level of
timber stocks and leads to a lower level of
extraction
• Higher extraction with higher proportion of
plantation area
Conflicts in Multi Species
Systems
• Interaction of Markets with non-market
based extraction results in loss of product
diversity
• In the end, changed nature of the forest may
reduce timber extraction capacity
• It will reduce outflow of other products and
the eco-system services.
• Chopra and Kumar (2003).
Concluding Remarks
• Formal models of Evolutionary Theorising
in Economics
• Applications to learning by doing
• Applications to firm survival in industry
• Nelson and Winter: Journal of Economic
Perspectives, Spring, 2002