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

1. 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

2. 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

3. Principal – agency theory and organizational design • Useful concepts: • Measurability of inputs • Asymmetric information • Enforcement and accountability • Separation of ownership and control • Contingencies in production

4. 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.

5. Asymmetric information • “I know something you do not.” • Principal: uninformed party • Agent: informed party whose information is relevant to common welfare

6. 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)

7. 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

8. 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

9. 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

10. Residual Risk Bearers: Reap profit Take loss Decision Managers: Generate proposals Implement decisions Decision Monitors: Ratify decisions Monitor decisions Actors in Productive Organization

11. Political-Economic System Green=community; Yellow=state; Blue=Private Example: German Forestry Management Municipality citizens State Forest Office Mayor/council State Managers State workers

12. Risk bearers: Community members Outside private firms Decision Managers: Foresters CBC General manager Jefe de Monte/Patio Documenter Decision Monitors: GA JV Advisory councils NGOs Semarnat Profepa Mexican Agrarian Communities

13. Work groups and individual level organization (survey sample)

14. 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”

15. Risk bearers: Municipality Managers: State municipal official private manager private ranger Monitors: State forestry office Mayor/Council Forest Council Municipal Supervision Auditors Certifiers German Municipalities

16. 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

17. Ideas from Agency Theory • Risk bearing ability • Internal control • External control • Agent signaling • Agent securities • “Hard” incentives • “Soft” incentives

18. 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

19. 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

20. 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: • Bankruptcy • Economics of scale • Manne: “Protect shareholders” (risk bearers)

21. 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

22. 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

23. 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

24. 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?

25. 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?

26. 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