Daniel H. Cole

The Meaning of Property Rights: Law versus Economics?

Property rights are fundamental to economic analysis. There is, however, no consensus in the economic literature about what property rights are. Economists define them variously and inconsistently, sometimes in ways that deviate from the conventional understandings of legal scholars and judges. This article explores ways in which definitions of property rights in the economic literature diverge from conventional legal understandings, and how those divergences can create interdisciplinary confusion and bias economic analyses. Indeed, some economists’ idiosyncratic definitions of property rights, if used to guide policy, could lead to suboptimal economic outcomes.

The 'Stern Review' and its Critics: Implications for the Theory and Practice of Benefit-Cost Analysis

The “Stern Review: The Economics of Climate Change” reached conclusions and policy recommendations dramatically different from most of the earlier economic analyses of climate change. It found that the costs of climate change, as well as the potential net benefits of greenhouse gas reductions, were much higher than previously estimated, and consequently recommended more rapid and extensive cuts in emissions than had many other economist analysts. A number of prominent economists have criticized the Stern Review on various grounds, including its damage estimates and the selection of parameter values, which affect the interest rate at which future costs and benefits are discounted to present value. This paper summarizes the Stern Review and its critiques, and assesses them from a process-oriented perspective to determine what they can teach us, positively and negatively, about how benefit-cost analyses should (or should not) be carried out.

Digging deeper into Hardin's pasture: the complex institutional structure of ‘the tragedy of the commons’

The institutional and ecological structure of Hardin’s “tragedy of the commons” appears deceptively simple: the open-access pasture eventually will be overexploited and degraded unless (i) it is privatized, (ii) the government regulates access and use, or (iii) the users themselves impose a common-property regime to regulate their own access and use. In this paper, we argue that the institutional structure of the “Herder Problem” (as it is known to game theorists) is far more complicated than it is usually portrayed. Specifically, it is not just about the pasture. It is equally about the grass that grows on the pasture and the cattle that consume the grass. Even Elinor Ostrom — a scholar known for embracing complexity — presented an overly simplistic portrayal of Hardin’s open-access pasture when she described its governance system as a null set of institutions. A more careful assessment of the situation, employing Ostrom’s Social-Ecological System (SES) framework, broadens the focus from the res communes omnium pasture to incorporate the res nullius grass that grows upon it and the res private cattle grazing there. The “tragedy” arises from the combination and interactions of the resources and their governing institutions, not just from the absence of property in the pasture. If the grass was not subject to appropriation, the cattle were not privately owned, or if property- and contract-enforcement institutions supporting market exchange were absent, the “tragedy of the commons” probably would not arise regardless of the pasture’s open-access status.

Toward a Total-Cost Approach to Environmental Instrument Choice

Most theories of environmental instrument choice focus exclusively on differential compliance costs. But compliance costs comprise only part of the total costs of environmental protection. Administrative costs - particularly the costs of measuring emissions and monitoring compliance - can differ significantly between environmental instruments. Those administrative cost differentials may offset the compliance cost advantages commonly associated with economic instruments, such as tradeable permits and effluent taxes. Moreover, measurement and monitoring constraints may increase ex ante uncertainty over the differential costs and benefits of alternative regulatory policies. That uncertainty may militate against selecting regulatory instruments that appear superior from the perspective of models focusing exclusively on compliance-cost differentials.

'Economic Property Rights' as 'Nonsense Upon Stilts': A Comment on Hodgson

Geoffrey Hodgson’s (2015) critique of extra-legal ‘property rights’ – in this case, so-called ‘economic property rights’ – is right on target. This Comment contributes two further points to his critique. First, the notion of ‘economic property rights’ is based on what Gilbert Ryle (1949) referred to as a ‘category mistake’, conflating physical possession, which is a brute fact about the world, with the right or entitlement to possession, which is a social or institutional fact that cannot exist in the absence of some social contract, convention, covenant, or agreement. The very notion of a non-institutional ‘right’ is oxymoronic. Second, the fact that property is an institutional fact does not mean it must exist with the structure of a ‘state’ (as Bentham suggested). Rather, institutions like ‘property rights’ only require some community, however large or small, operating with what Searle (1995; 2005) calls collective intentionality and collective acceptance, according to shared ‘rules of recognition’ (Hart 1997).

‘Best Practice’ Standards for Regulatory Benefit–Cost Analysis

Government agencies have endeavored, with limited success, to improve the methodological consistency of regulatory benefit–cost analysis (BCA). This paper recommends that an independent cohort of economists, policy analysts and legal scholars take on that task. Independently established “best practices” would have four positive effects: (1) they would render BCAs more regular in form and format and, thus, more readily assessable and replicable by social scientists; (2) improved consistency might marginally reduce political opposition to BCA as a policy tool; (3) politically-motivated, inter-agency methodological disputes might be avoided; and (4) an independent set of “best practices” would provide a sound, independent basis for judicial review of agency BCAs.

Political Institutions, Judicial Review, and Private Property: A Comparative Institutional Analysis

Since Madison, jurists of all ideological stripes have more or less casually presumed that constitutional judicial review is absolutely necessary to protect private property rights against over-regulation by political bodies. During the twentieth century, this presumption led directly to the institution of regulatory takings doctrine. Recently, the economist William Fischel and the legal scholar Neil Komesar have raised important questions about, respectively, the utility and the sufficiency of constitutional judicial review for protecting private property. This article supports their arguments with theoretical and historical evidence that constitutional judicial review (1) is not strictly necessary for protecting private property rights, and (2) may have substantially less marginal social utility than most jurists presume. The theoretical evidence comes from positive politicaleconomic theories of property rights, according to which political institutions can be expected to substantially protect property rights in order to secure political and military support and generate tax revenues. The historical evidence comes primarily from the United Kingdom, where property rights have never been judicially protected against intentional and uncompensated parliamentary expropriation or regulation, but where Parliament has imposed substantial limits, including compensation requirements, upon itself. Further evidence comes from several American states that have enacted takings statutes. The evidence presented in this article supports William Fischel’s normative conclusion that judicial review is more important for protecting private property against the depredations of local governments than state or federal governments. It also provides reason to believe that property rights will be protected even if Neil Komesar is right that the courts are institutionally incapable of doing so. Finally, the article carries possible normative implications for regulatory takings doctrine.

Environmental instrument choice in a non-linear world

ABSTRACT The substantial literature on environmental instrument choice under uncertainty has provided valuable insights using simplifying assumptions of linear marginal cost and benefit curves and additive error terms to determine when and why a price or quantity instrument should be preferred. But empirical analysis has shown that linearity and additivity are not the norm. This paper explores the formal properties of instrument choice when the marginal benefit and marginal cost curves are non-linear; the error term is multiplicative and assumed to be exponential; and the choice is expanded to include comparisons among different price and different quantity regimes, as well as choices between these types. In this more realistic environment, we show that small changes in variance and parameter values can have a significant impact on optimal instrument choices.

Laws, Norms, and the Institutional Analysis and Development Framework

Elinor Ostroms Institutional Analysis and Development (IAD) framework has been described as ‘one of the most developed and sophisticated attempts to use institutional and stakeholder assessment in order to link theory and practice, analysis and policy’. But not all elements in the framework are sufficiently well developed. This paper focuses on one such element: the ‘rules-in-use’ (a.k.a. ‘rules’ or ‘working rules’). Specifically, it begins a long-overdue conversation about relations between formal legal rules and ‘working rules’ by offering a tentative and very simple typology of relations. Type 1: Some formal legal rules equal or approximate the working rules; Type 2: Some legal rules plus (or emended by) widely held social norms equal or approximate the working rules; and Type 3: Some legal rules bear no evident relation to the working rules. Several examples, including some previously used by Ostrom, are provided to illustrate each of the three types, which can be conceived of as nodes or ranges along a continuum. The paper concludes with a call for empirical research, especially case studies and meta-analyses, to determine the relevant scope of each of these types of relations, and to provide data for furthering our understanding of how different types of rules, from various sources, function (or not) as institutions.

Contextualizing the influence of social norms, collective action on social-ecological systems

The influence of social norms in social-ecological systems is often dramatic but also deceptively complex. Ostrom’s work elegantly leverages research from experimental economics and case studies of common-pool resource systems to demonstrate that many collective action dilemmas can be successfully resolved (Ostrom, 2000). This analysis was by no means suggested as a universal or generalizable foregone outcome as there are many cases of failures to overcome collective action problems. Furthermore, collective action problems only constitute a subset of social-ecological systems found globally. Thus, in order to understand the interplay between social norms and collective action in social-ecological systems it is necessary to contextualize these dynamics within a broader framework that encompasses a broad area of components in Social-Ecological Systems (SESs). Ostrom’s later work did just this, with publications that were clearly inspired by her earlier foundational work. In particular, what has become known as the ‘SocialEcological Systems Framework’ (Ostrom, 2009) outlines numerous elements of socialecological systems that received relatively little attention in the 2000 manuscript. And as was noted by Ostrom in 2000, ‘empirical and theoretical work in the future needs to ask how a large array of contextual variables affects the processes of teaching and evoking social norms’ (p. 154). Here we explore selected arenas that are of particular interest to the evolution of SESs while at the same time attempting to synthesize some of the work that followed after Ostrom’s 2000 publication.