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Hidden Failure of 'Successful Institutions': Community Management of CPRs

Contrary to the neoclassical assumption that the freeriding behaviour of selfish utility-maximising individuals leads to under-provisioning of common pool resources, Elinor Ostrom empirically demonstrated that communities themselves devise institutions in order to organise collective action to "successfully" manage the cprs in a sustainable, efficient and equitable manner. This paper argues that there is a "hidden failure" even in those cases where community management is claimed to be "successful" within Ostrom's framework.


Hidden Failure of ‘Successful Institutions’: Community Management of CPRs

L Venkatachalam

Contrary to the neoclassical assumption that the freeriding behaviour of selfish utility-maximising individuals leads to under-provisioning of common pool resources, Elinor Ostrom empirically demonstrated that communities themselves devise institutions in order to organise collective action to “successfully” manage the CPRS in a sustainable, efficient and equitable manner. This paper argues that there is a “hidden failure” even in those cases where community management is claimed to be “successful” within Ostrom’s framework.

This paper was written when the author was a Fulbright-Nehru Senior Research Fellow at the University of California, Berkeley. Michael Hanemann and David Zetland provided useful comments on an earlier version of this paper. However, the usual disclaimer applies.

L Venkatachalam ( is at the Madras Institute of Development Studies, Chennai.

linor Ostrom, who shared the Nobel Prize in Economics with Oliver Williamson for the year 2009, made a notable contribution to the literature on the management of common pool resources (CPRs). In particular, her contribution was to the vibrant debate regarding which form of institution is more efficient in managing the CPRs in terms of enhancing the sustained well-being of a large number of resource-dependent communities. Ostrom (1994), by using empirical evidences from around the world, demonstrated that in many cases it is neither the government nor the market, but rather the institutions d evised by the communities themselves that play a catalytic role in bringing collective action among the members to promote e fficient, equitable and sustainable CPR management (Ostrom 1990; see also Bandyopadhyay et al 2009).

Following her work, a substantial amount of literature critically evaluating collective action and CPR management has already emerged in the academic and policy arena (Araral 2009; Agrawal and Chhatre 2006; Wade 1988). A section of the existing literature deals largely with one particular research question: Under what circumstances does collective action emerge to manage the CPRs “successfully”? (Mainzen-Dick et al 2002). A narrow econometric approach to answer this question is to take the “discrete” outcome, i e, the probability of an outcome (such as cooperation) becoming either a “success” or a “failure”, and to analyse the extent to which certain observable, confounding factors influence that outcome (Naidu 2009). But the problem with this part of the literature is that it does not critically evaluate how “successful” the community management is, in terms of maximising larger social benefits. In this paper, we attempt to analyse this issue.

Community Management and Positive Externalities

The issue in the economics of CPR management is fundamentally a behavioural one. The neoclassical assumption is that the groups managing the CPRs consist of selfish utility-maximising individuals and the freeriding behaviour of these individuals is predicted to usually result in under-provision of these CPRs (Olson 1965). In a prisoners’ dilemma set-up, each rational individual will have no incentive to contribute a positive sum towards managing the CPR since she would believe that her contribution to the common pool does not make a larger difference in the overall contribution. When faced with the discrete choices “to contribute” or “not to contribute”, the rational individuals are expected to choose the latter even if the individual benefit derived by contributing is greater than that of not contributing. Hence, “shirking” becomes a dominant strategy in the absence of institutions to curtail such

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behaviour. Unless the selfish motive of the rational individuals is contained through institutional arrangements, the users committing self-destruction either through over-use or through destruction of the CPRs by an act of under-provisioning becomes inevitable (Hardin 1968). Moreover, if the behaviour is myopic – reflected usually in terms of the individuals’ high rate of discount on r esource consumption – the self-destruction is expected to set in faster than the one that may occur in the normal course of action.

It is assumed that ceteris paribus, freeriding behaviour in the context of CPRs becomes an overriding phenomenon under the centralised (usually, the government) management regime. U nder such a regime, the transaction cost of not only carrying out the freeriding behaviour but also transmitting it over a period of time is negligible to the freeriders due to low probability of g etting caught or punished for such behaviour. Further, the net benefits associated with this behaviour are also higher compared to an alternative management regime where such behaviour is restricted. On the other hand, monitoring and punishing the freeriders becomes a costly affair for the centralised authority. Though freeriding behaviour is absent under the private property regime, privatisation of CPRs as a solution to this problem is less practicable because of issues such as “indivisible” nature of these CPRs. Since the government intervention as well as the market solution is either inefficient or infeasible, Ostrom (1998) suggests that informal institutions such as norms, rules and habits that are embedded in the communities provide incentives for suppressing the freeriding behaviour and bring in cooperative behaviour among the members in order to generate desirable outcomes. Many CPRs including irrigation water, forests, fisheries and grazing lands are cited as examples of how these are being collectively managed by the communities successfully (Ostrom 2000). However, the word “successful” requires critical evaluation.

Ostrom (2000) admits that though community management of CPRs is successful in many cases, there are instances where community failure has also been observed. As we have already pointed out, a substantial amount of literature has been devoted to probing into the causes for success and failure of the community management. However, there exists a paucity of studies that critically evaluate how successful the communities are in terms of maximising the social benefits falling outside their purview. In other words, the communities that are successful in bringing collective action to maximise their private benefits may in certain cases fail to maximise the social benefits to the users outside the community.

Conditions for ‘Successful’ Management

To understand the above issue in a proper context, let us look at the economic benefits that could be potentially generated by a community-managed watershed. The total benefits generated by a watershed can be broadly classified into direct use values (e g, increased availability of irrigation water, fodder and fuel wood) and indirect use values (e g, downstream benefits such as















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reduced soil erosion, increased groundwater recharge and improved water quality). While the former can be utilised by the immediate community/users within the watershed area, the latter can be realised by users located several miles downstream of it. It should be noted that the nature and scale of the watershed determine the size (or the value) and the composition of these two benefits; in certain cases, the direct benefits may constitute a major portion of the total benefits and in certain other cases, indirect benefits may do so. The benefit-side of the watershed suggests that Ostrom’s prescription of community management is applicable only to a limited number of CPRs with the following characteristics: (1) when the size of the “direct benefits” constitute a major part of the total benefits; (2) when the volume of the indirect benefits as well as the number of users of these benefits is negligible; (3) when the indirect users can be easily identified to be either included or excluded from the resource use, and the transaction cost of doing so is negligible; and (4) when implementing the rules and sanctions on the indirect users does not have any future negative consequences on the resource base and does not impose substantial transaction costs to the rule- implementing community.

All the above imply that the community management of the watershed, even if successful in terms of direct use benefits, will not be “socially efficient” if (1) the indirect benefits constitute a larger share of total benefits; (2) the proportion of users of the indirect benefits (non-participants in decision-making) is substantially greater than that of direct beneficiaries (decisionmakers); (3) the management institutions are designed mainly around the direct benefits ignoring how these institutions affect the indirect benefits downstream; (4) inclusion of users of indirect benefits in the decision-making is prohibitively costly; and

(5) size of the resource base required for generating indirect b enefits is larger than the actual size being managed by the u pstream community.

It should be noted that Ostrom (2000) defines CPRs based on “non-excludability” (excluding a freerider is highly costly) and “subtractability” (consumption of a service by one person adversely affects the consumption of the same service by another person). If these two conditions hold, then the CPRs become v ulnerable to overuse. However, Ostrom demonstrated that the communities managing the resource base have devised cost- effective institutions – such as, norms, rules and sanctions – either to exclude the freeriders or to encourage cooperation among the members, thereby avoiding the subtraction of the resource base (Ostrom 2000). But there exist a number of CPRs (like the watershed above) where the excludability criterion is applicable only to the “identifiable users” of mainly the direct benefits; this does not consider the “actual users” of the indirect benefits downstream who continue to enjoy the benefits but do not virtually participate in decision-making. This category of users may not necessarily be the new entrants (so that they could be excluded by using certain rules or sanctions) but they might have been already using the services of the resource base (or, the positive externalities) along with the upstream users – the community – of the direct benefits. These indirect users, in most cases, do not “voluntarily” contribute towards the cost of managing the resource-base upstream but may bear the cost of negative externality imposed by

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Figure 1: Benefits and Costs of Managing the Resource Base at Different Levels

MC Marginal Benefits and Marginal Costs b

MB2 (MB1 + a Indirect Benefits)

MB1 (Direct Benefits) N1 N2 Size of the Resources

the upstream users. The downstream users are put in a greater disadvantage when major decisions by the upstream community ignore the indirect benefits that fall outside its own well-defined physical boundary. Here, the non-excludability of downstream users is still obvious which causes the disadvantages. As Ostrom (2000: 342) puts it:

Groups of individuals are considered to share communal property rights when they have formed an organisation that exercises at least the collective choice rights of management and exclusion in relationship to some defined resource system and the resource units produced by that system.

So the community is concerned only about the “defined resource system” and not the entire resource use system that also includes the indirect benefits falling outside its property rights domain. If Coasian bargaining between the upstream and downstream communities is possible, then one can expect a Pareto optimal outcome. However, if the Coasian bargaining is constrained by asymmetric information, high level of transaction cost and intense conflict between the users, then status quo would become the feasible outcome. Therefore, the crux of the problem is that if the decision-making community or the group of direct users acts as a “selfish utilitymaximising rational individual”, the social outcome becomes suboptimal. This is reflected from Ostrom’s (2000: 343) statement:

…whether it is difficult or costly to develop physical or institutional means to exclude non-beneficiaries depends both on the availability and cost of technical and institutional solutions to the expected benefits of achieving exclusion from a particular resource (emphasis added).

If the decision to exclude or include others is a rational decision based on the private benefits and costs affecting the decision making community, then, by analogy, the decision to manage the “size” of the resource base should also be based on the associated benefits and costs. If the costs of managing the resource base for the upstream community are greater than their expected benefits, one can expect the community to adopt “shirking” as a dominant strategy which will lead to reduce the size of the resource base up to that level where its marginal costs are equivalent to the marginal benefits. Since the marginal benefits of the community include only the expected value of the direct benefits alone, the optimum size of the resource managed will be smaller than the social optimum that includes the indirect benefits as well. Let us explain this diagrammatically.

In Figure 1, N1 refers to the optimum level of resource base being managed on the basis of marginal benefits and marginal costs when the direct benefits and direct costs alone are taken into account. But moving from N1 to N2 shifts the marginal benefit


curve (MB2) to the right suggesting that more efficiency can be achieved by expanding the size of the resource base. This is because the size of the indirect benefits is positively correlated with the size of the resource base (e g, moving from N1 to N2 shifts the MB curve to the right); however, increasing the size of the resource base also increases the community’s marginal cost above its marginal (direct) benefits (i e, the community has to bear a marginal cost equivalent to the difference between “a” and “b” on the Y-axis if it expands the resource base from N1 to N2). This implies that though there is a potential improvement in the social welfare due to increased size of the resource base, there is a disincentive for the “rational, maximising” community to do so. Even if the resource base starts at N2 level initially, the community will reduce the size of the resource to N1 because that is where it could successfully manage the resource base economically. In other words, from the community’s point of view (as well as from the researchers’ point of view) the resource managed at N1 is efficient but from the society’s point of view, N1 is still suboptimal.

The “size of the community”, the size of the resource base and the size of the benefits generated are positively correlated; any reduction in the community’s size is expected to reduce the size of the indirect benefits. The community’s decision to manage the resource base is mediated by both exogenous as well as endogenous factors. Sanctions are one form of institutional rule i mposed on the non-cooperative individuals, in order to bring collective action. But sanctions will lead to counterproductive outcomes if the freerider finds her private benefits from cooperation to be lesser than that from non-cooperation and this has the power of altering the optimum size of the community adversely. For example, if the community consists of subgroups that are heterogeneous in nature (caste groups for example), sanction imposed on a member of one subgroup may induce this subgroup to adopt non-cooperative behaviour. Similarly, the opportunity cost of resource management may increase over a period of time for certain members of the community due to the influence of exogenous factors, such as better employment opportunities in urban sectors. These factors would increase the marginal cost of management for the remaining members of the community, who may reduce their cost by shrinking the size of the resource base. So, the dynamic interaction between the size of the community, endogenous and exogenous factors influencing the behaviour of the individual members, size of the resource base and the associated costs and benefits has a direct bearing on the welfare of the users of indirect benefits. In other words, the above dynamism creates an imbalance between the community equilibrium and the social equilibrium – the former being smaller in magnitude than the latter.

Empirical Studies

To our knowledge, empirical attempts to estimate the trade-off between upstream and downstream benefits under a “successful CPR regime” are limited. However, there are studies which implicitly provide empirical support to our theoretical argument that if the upstream community behaves in a rational manner, it would alter the welfare of the downstream users either positively or negatively. Pattanayak (2004), for example, studied change in the tropical forest watersheds and the resulting impact on the base-flow which in turn affected the drinking water availability in the downstream areas. He used the watersheds in Ruteng Park in Indonesia as a case study. Utilising the crosssectional variation of base-flow across different sub-watersheds to study its impact on opportunity cost of water collection at the household level, the author found that increase in the forest cover leads to increase in the base-flow, enhancing drinking w ater availability in the 47 villages downstream of the park. It was estimated that a 100 mm increase in the base-flow (i e, 10% increase in the current level) would result in reducing household water collection cost by 30 Indonesian rupiahs, on an a verage. An earlier study by Pattanayak and Kramer (2001) in the same region established that increased base flow due to f orest protection increased the agricultural benefits, through enhanced drought mitigation service.

A recent study in the Western Ghats region of Karnataka by Lele et al (2009) categorically established that regeneration of forest cover in the upstream areas of the Western Ghats resulted in reducing the stream-flow which in turn reduced the agricultural output in the downstream villages. Similar results are observed in watershed areas in semi-arid regions, including those watersheds managed by the communities. Hope (2007) reported that the watershed programme implemented in the dry areas of Madhya Pradesh resulted in significant reduction in the domestic water collection time, though it did not do better in terms of increasing the agricultural income of the farmers significantly. The findings of this study imply that if the primary objective is to manage the watersheds to increase the agricultural productivity and if that objective is not being met, then there is a possibility that communities would give up managing these watersheds, which would affect the other benefits such as drinking water availability for different users. Shiferaw et al (2008) conducted a study in 12 villages in four semi-arid districts of Andhra Pradesh, where watershed programmes have been implemented to recharge the groundwater. They found that these programmes r edistributed the benefits and costs unevenly across different stakeholders due to depletion of groundwater, caused by unregulated use in the watershed areas. They argued that “...unless households and communities make sufficient investments in groundwater recharging systems and adopt regulating mechanisms, the remaining aquifers are likely to be depleted in the near future” (p 332).

The above empirical studies suggest: (1) any change in the forests or watersheds will lead to a change in the indirect benefits generated by these resources (Lele and Venkatachalam 2006). In certain cases, increased resource base leads to increase in the quantum of environmental benefits and in certain other cases, the quantum of benefits decline. But this has larger implications on the community management and collective action. If the community reduces the size of the resource base when the level of r esource and the volume of indirect benefits are positively correlated, then there will be loss of welfare to the users somewhere else; if the relationship between resource base and the quantum of indirect benefits is negative, then the community’s effort to i ncrease the resource base would also lead to reduce the social

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welfare. It would also suggest (2) in many cases, the “required rational communities can behave opportunistically in a way that collective action” to maximise the total benefits has not emerged can impose larger social costs on other users in order to maintain or at all. Moreover, if the upstream community has a greater com-increase its own private benefits. parative advantage to change the resource base under its management, it can deliberately impose welfare loss on the down-


stream communities in o rder to retain or maximise its own ben-It should be noted that CPR management becomes a “real sucefits. A study by Xiaogang (2001) highlights this issue. Concen-cess” only when there is adequate incentive for maximising the trated logging by communities living in the upstream areas in joint production of both the direct as well as the indirect benefits the Lashi watershed region in Lijiang (China) adversely affected by the decision-making communities. This is also evident from the quality of water supplied to the downstream town of Lijiang. the case studies cited in Ostrom (2000). For example, the Swiss When the government intervened to prevent logging activities, peasants divided the common land on the plains into private the communities managed to maintain their benefits by way of property but maintained the upstream land in the Alpine hillside using practices that are more harmful to the downstream users. as “common property”. This could be because they were fully For example, when logging was banned, the upstream commu-aware that dividing the hillside land into small parcels would nity started cutting trees in the form of fuelwood. Since fuel-lead to reduce the flow of benefits on their private land downwood fetched lower revenue than logging, people started cutting stream. Since they knew that managing two different lands with more trees to compensate for the income loss, resulting in more different property rights system maximises their overall benefits, damage downstream. In a nother incident in the same region, the their decision was socially optimal. The managers as well as the upstream communities cleared more forest lands in their region beneficiaries are the same and therefore, they know how to optiso that increased flooding can damage the downstream villages mise between lands under different property rights system. in order to bring a halt to the illegal logging in their region, car-I nstead, if the managers of the upstream common land are difried out by the downstream villagers. In another reciprocal act, ferent from the beneficiaries of the private land in the plains, the upstream community deliberately cut off the water supply to then the net outcome would be an imbalance in the incidence of the downstream villagers who carried out illegal logging up-benefits across the agents. Our analysis suggests that commustream. This is clear-cut evidence of how a community’s recipro-nity-based institutions need to be complemented with other cal behaviour can curtail the opportunistic behaviour of the types of incentive-based institutions so that the social benefit of opponents; but at the same time, these examples also tell us how CPR management can be maximised in future.

December 11, 2010
Dissecting the Ayodhya Judgment – Anupam Gupta
Secularism and the Indian Judiciary – P A Sebastian
Idols in Law – Gautam Patel
Issues of Faith – Kumkum Roy
Was There a Temple under the Babri Masjid?
Reading the Archaeological ‘Evidence’ – Supriya Varma, Jaya Menon
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