1.4 Collective Action Theory and Cooperatives Flashcards Preview

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1

Which economic categories of goods can be distinguished and which criteria are used for this purpose? Use examples (slides)

Private Goods: are those that have the property of divisibility and excludability. That means that they can be divided and excluded. The marginal cost of providing an additional unit to another user is greater than zero. Example: If I by one ice cream you can eat the same one as I have and to by another one it costs something. These goods yield some utility to the owner of these goods which means they are highly excludable. Also the owner can exercise the property rights over these goods and prevent it from others who try to make benefits from these goods which can be expressed as rivalry. The marginal cost of an additional unit is not equal to zero. Example: Food items, clothing, cars, electronics etc

Public Goods: These goods are not excludable and non-rival (not divisible). The marginal cost of provision is zero. Which means that the use of these goods does not decrease the goods´availability to others. Also no one can be excluded from using these goods. Example: Earth’s atmosphere like sunlight, air, etc.  Example: a natural landscape – it cannot be divided and the fact that I can observe and admire it does not exclude you to observe and admire it at the same time and without costs.

Common-property and common-pool resources:  There is huge rivalry among these goods but it is difficult to exclude anyone from using these goods. They are subject to depletion which means if someone is using them, then others cannot use them. Example: aquifers, fisheries, forests  etc  * Elinor Ostrom: “Governing the Commons”.

Club Goods: These goods are excludable but non rivalry. These goods are excludable when it reaches the point where any new person cannot derive any benefit from those goods. Are not subjected to depletion.  Example: tennis club, brand label , cinemas, private parks, guarded beach etc.

The criteria used to distinguish goods are as follows:

a. The rivalry can be understood as the physical use of a good by someone in order to decrease the probability that others use the same good

b. Exclusion is defined as the right to have access to the goods or ownership of the goods.

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2

Can we consider an aquifer that is barely used a common-pool resource? Do you think air quality (e.g., appropriate concentrations of CO2 in the atmosphere) is a public or CPR? Please reason your answers. (slides)

Yes, an aquifer that is barely used is consider a common-pool resource because these are natural resource system and there is rivalry among these goods but it is difficult to exclude anyone from using these good, resulting in subject to depletion (if it is barely used now, doesn’t mean that it’s not going to be used in the future, because is difficult to exclude anyone from using it).

The air quality is a public good because it is not excludable and non-rival (not divisible).  Everybody has indefinitely access to the air and we cannot exclude anyone from using it.

3

If we did not know how to construct fences would pastures be a CPR? Is a fishing ground that is successfully governed by a local community a CPR anymore? Please reason your answers with regard to the role of technology vs. institutions and the typology of goods. (slides)

Yes, because a pasture without fences is a natural system. Besides that, it would be very difficult to exclude someone to use it and everybody would try to uses most, meaning a high rivalry for the pasture. That’s why the external environment influences such as technology may help to manage the commons (for example the construction of a fence), as well as some institutional arrangements such as rules, advices etc. to help in such conditions. The same works for a fishing ground, if it is successfully governed by a local community it just means that this community found a way to manage this CPR in a way that will assure the sustainable use of this resource.

4

What are common pool resources (CPR) and what is meant by the tragedy of the commons? (slides; Hardin 1968)

Common Pool Resources consist of a natural and man-made resource system. There is huge rivalry among these goods but it is difficult to exclude anyone from using these goods. They are subject to depletion which means if someone is using them, then others cannot use them. Example: Fisheries, timber, coal etc

Tragedy of the commons: The tragedy of the commons is a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource, even when it is clear that it is not in anyone's long-term interest for this to happen.

The tragedy of the commons can be considered in relation to environmental issues such as sustainability. The commons dilemma stands as a model for a great variety of resource problems in society today, such as water, land, fish, and non-renewable energy sources such as oil and coal. More general examples (given by Hardin) of potential and actual tragedies like: Clearing rainforest for agriculture in southern Mexico etc.

The example of a common pasture is given by Hardin to explain the tragedy of the commons. It involves a pasture which is open to all. He asks us to imagine that there is a common ground on which animals of different individuals can graze. It is expected that each herdsman will try to keep as many cattle as possible on the commons. Each herdsman acting rationally would like to maximize his gain by adding more animals. The herdsmen need to identify how much benefit can be derived by adding one more animal to his herd. Yet, every animal added to the total will degrade the commons by a small amount. The herdsman who has added one more animal will get the complete benefit from the proceeds of one more animal. On the other hand, the others herdsmen will face a small effect of overgrazing by that animal. If all owners follow this pattern the commons will ultimately be destroyed. And, being rational actors, each owner ads to their flock.

5

Please describe the debate on the tragedy of the commons (i.e. the traditional vs. conventional perspectives over it). (slides; Ostrom 2002)

The tragedy of commons occurs when multiple individuals uses common pool resources together keeping their own interest at heart. It also occurs when an individual behaving rationally would like to keep his self interest and tries to maximize his gains out of common pool resources. If this act is done by one individual it would not have a great effect, but if all individuals start following the same act and try to maximize their gains. Then ultimately they would deplete the common pool resource knowing that it will not give all of them benefit in long period.

The conventional theory used to predict and explain how local users will relate to resources that they share makes a uniform prediction that users themselves will be unable to extricate themselves from the tragedy of the commons. Using this theoretical view of the world, there is no variance in the performance of self-organized groups. In theory, there are no self-organized groups. Empirical evidence tells us, however, that considerable variance in performance exists and many more local users self-organize and are more successful than it is consistent with the conventional theory  (Ostrom, 2002) Panaceas for CPR’s: “Tragedy of the Commons Debate”:

  • Hardin envisioned helpless resource users to prevent resource destruction must impose government ownership or private ownership
  • Community control now proposed by some as a solution to resource destruction
  • All 3 panaceas: government, private or community control work in some settings and fail in others. They depend on the match of the specifics as well as how implemented

Challenge 1: The Panacea Trap

  • panaceas =policy advice for the best way to govern and manage
  • CPRs: assuming that there is one simple cure, all for multiple ecological systems
  • scholars and policy makers fall into panacea traps even when they assume an uncertain world
  • derived from basic failure to recognise the differences among CPRs in diverse sectors, at multiple spatial scales and over time

Challenge 2: Accepting rather than Rejecting Complexity

  • scientific progress involves understanding complex, decomposable, multi-tier
  • interactions are rarely linear additive
  • cannot assume away complexity and be successful in remedying problems
  • must dig into complex systems that are partially decomposable e.g. levels, units (How to analyse despite the complexity? Decompose, analyse, determine interactions etc.)

Challenge 3: Recognise value of Institutional Diversity

  • panaceas thinking focuses on simplified policy solutions: private, governmental, communal ownership (reality: much more institutional solutions)
  • research finds vast numbers of specific rules used ins sustainable systems tied to specific variables of a resource system and its units
  • scientists recognise and want to protect biological diversity (then best protected against shocks)
  • to achieve sustainability we must recognise and understand institutional diversity rather than trying to eliminate it as “too confusing”

Tragedy of the commons can be avoided without either privatisation or government bureaucracy. People can solve their problems by crafting rules and forming organisations.

6

“Common pool resources” is a concept based on the physical attributes of a natural resource that needs an institutional design for its use. Does this mean that common pool resources must always be institutionalized as common property? (slides)

No. But that was the line of thinking from Garrett Hardin, who first explains the tragedy of commons. While Hardin recommended that the tragedy of the commons could be prevented by either more government regulation or privatizing the commons property, subsequent Nobel Prize-winning work by Elinor Ostrom suggests that handing control of local areas to national and international regulators can create further problems. Ostrom argues that the tragedy of the commons may not be as prevalent or as difficult to solve as Hardin implies, since locals have often come up with solutions to the commons problem themselves; when the commons is taken over by non-locals, those solutions can no longer be used. Ostrom recognizes that there are real problems, and even limited situations where the tragedy of the commons applies to real-world resource management.

Larger regimes can facilitate local self-organization by providing accurate information about natural resource systems, providing arenas in which participants can engage in discovery and conflict-resolution processes, and providing mechanisms to back up local monitoring and sanctioning efforts. The probability of participants adapting more effective rules in macro-regimes that facilitate their efforts over time is higher than in regimes that ignore resource problems entirely or, at the other extreme, presume that all decisions about governance and management need to be made by central authorities. With the legal autonomy to make their own rules, appropriators face substantially lower costs in defending their own rules against other authorities. They are also more likely to agree upon rules whose operation they understand from prior experience, than upon rules that are introduced by external actors and are new to their experience. Diversity is important for Sustainability. Both biological (extensive scientific findings —> well accepted) and institutional (importance not accepted) diversity. However, simple institutional blueprints are frequently recommended e.g. government ownership, privatise land and co-management. Importing blueprints can reduce institutional diversity. Variations of all three options can fail.

7

Which ecological conditions are supportive for cooperative governance of natural re-sources? Cite three of them and give a reasonable justification of why those conditions contribute to cooperation. (Agrawal 2001)

  1. Small size (RW)
  2. Well-defined boundaries (RW, EO)
  3. Low levels of mobility
  4. Possibilities of storage of benefits from the resource
  5. Predictability

According to Wade, relatively small sized resource systems are likely to be managed better under common property arrangements, and according to both Ostrom and Wade, resources that have well-defined boundaries are likely better managed as common property.  Besides that, predictability of benefit flow from the resource, dependence of users on the resource, and successful experience in other arenas of self-organization (Agrawal 2001).

Greater mobility of resources and storage problems make it more difficult for users to adhere to institutional solutions to common pool resource dilemmas because of their impact on the reliability and costs of information needed for such solutions. These two factors have an impact on management because of their relationship to information. For Example: Resources such as wildlife are mobile and cannot be stored, and groundwater basins and lakes have stationary water resources characterized that can be stored. Shellfish and grazing lands are stationary but their degree of storage is limited, and conversely, irrigation canals with reservoirs have water resources that can be stored, but are mobile. Sheep flocks and cattle herds, owned and/or managed as common property, would also fall in this last category.

  1. Stationarity and Storage:
  • stationarity refers to whether a resource is mobile and storage concerns the extent to which it is possible to collect and hold resources.
  • resources such as wildlife are mobile and cannot be stored. Groundwater for example is stationary and can be stored.
  • greater mobility and storage problems make it more difficult for users to adhere to institutional solutions to common-pool resource dilemmas because of their impact on the reliability and costs of information needed for such solutions.
  • have an impact on management because of their relationship to information
  1. Unpredictability and Riskiness
  • the extant to which the resource availability is predictable
  • unpredictability affects the ability of users to allocate available resources and undertake activities that augment supply
  1.  Well-defined boundaries
  • resources that have well-defined boundaries are likely better managed as common property
  • boundaries of resources should be well defined when flow of benefits is predictable and groups relying on them are stationary
  • however, if there is unpredictability and groups are mobile the resource boundaries should be fuzzy as to accommodate variations in group needs and resource flows.
  • small-scale systems with clear (spatial) boundaries are “researcher-friendly”: a local irrigation system, fish in a lake, common pastures in a village, community forests
  • whether or not such boundaries exist, depend on nature related transactions: actors responsible and actors affected, and the resulting interdependence between them may be dissipated, fuzzy, not transparent, time lags, …
  • many dimensions and attributes of SES do not allow for such a decomposability of transactions that result in small-scale systems boundaries.

8

Which social conditions are supportive for cooperative governance of natural resources? Cite three of them and give a reasonable justification of why those conditions contribute to cooperation. (Agrawal 2001)

  1. Small size (RW, B&P)
  2. Clearly defined boundaries (RW, EO)
  3. Shared norms (B&P)
  4. Past successful experiences-social capital (RW, B&P) 1659
  5. Appropriate leadership-young, familiar with changing external environments, connected to local traditional elite (B&P)
  6. Interdependence among group members (RW, B&P)
  7. Heterogeneity of endowments, homogeneity of identities and interests (B&P)
  8. Low levels of poverty

Small size of a user group, a location close to the resource, homogeneity among group members, effective enforcement mechanisms, and past experiences of cooperation are some of the themes they emphasize as significant to achieve cooperation.  Group size and resource size, or shared norms, interdependence among group members, and fairness in allocation rules, or ease of enforcement and supportive external sanctioning institutions.

Interdependence, social capital, and low levels of poverty promote well-defined boundaries for the group and the resource; and (c) well-defined boundaries, ease of enforcement, and recognition of group rights by external governments leads to sustainable institutional performance.

Resource users often create institutional arrangements and management regimes that help them allocate benefits equitably, over long time periods and with only limited efficiency losses. All common resource users are confronted with the problem of how to reduce or eliminate externalities related to resource management.

  1. Size
  • research has shown that smaller groups are more likely to engage in successful collective action
  • however, the impact of group size on collective action is usually mediated by many other variables e.g. production technology, excludability, jointness of supply etc.
  • more research should be done
  1. Heterogeneity
  • most resources are managed by groups divided along multiple axes, among them ethnicity, gender, religion, wealth and caste
  • example gender: women often play an important role in gathering and harvesting products from CPR. The relative marginality to which they are involved in decision making, ownership of assets and exercising political power does not reflect this. (invisible to the margins)
  • heterogeneity of groups can be pernicious and can have multiple and contradictory effects on the possibilities of collective action.
  • even in groups with high heterogeneity it may be possible to ensure collective action if some subgroups can coercively enforce conservationist institutions.
  1. Power Relations, Poverty & Distribution of Benefits
  • better-off group members are often likely to gain a larger share of benefits from a resource
  • emergence in research is the relationship between the poverty of users and their levels of exploitation of CPR —> either poverty leads to greater reliance on the commons and their degradation or does increasing wealth lead to increased use of the commons
  • fairness in allocation of benefits from the commons would lead to more sustainable institutions arrangements. However, hierarchical social and political organization and institutional arrangements that specify asymmetric distribution of benefits may be more sustainable even if they are entirely unfair.

9

Which institutional conditions (i.e. institutional design principles) are supportive for cooperative governance of natural re-sources? Cite four of them and give reasonable a justification of why those conditions contribute to cooperation. (slides; Ostrom 2005)

1. Clearly defined boundaries. The boundaries of the resource system (e.g., irrigation system or fishery) and the individuals or households with rights to harvest resource units are clearly defined.

2. Proportional equivalence between benefits and costs. Rules specifying the amount of resource products that a user is allocated are related to local conditions and to rules requiring labor, materials, and/or money inputs.

3. Collective-choice arrangements. Many of the individuals affected by harvesting and protection rules are includes in the group who can modify these rules.

4. Monitoring. Monitors, who actively audit biophysical conditions and user behaviour, are at least partially accountable to the users and/or are the users themselves.

5. Graduated sanctions. Users who violate rules-in-use are likely to receive graduated sanctions (depending on the seriousness and context of the offence) from other users, from officials accountable to these users, or from both.

6. Conflict-resolution mechanisms. Users and their officials have rapid access to low-cost, local arenas to resolve conflict among users or between users and officials.

7. Minimal recognition of rights to organize. The rights of users to devise their own institutions are not challenged by ... governmental authorities, and users have to.... to the resource.

For resources that are part of larger systems:

8. Nestled enterprises. Appropriation, provision, monitoring, enforcement, conflict resolution, and governance activities are organized in multiple layers of nested enterprises

10

Which three ideas/images/concepts is early theory of collective action associated with. Explain them. (slides; Hardin 1968; Gordon 1954)

Three metaphors commonly applied to CPR situations to predict suboptimal use and/or destruction of the resource

G. Hardin's tragedy of the commons (1968): Assumes that individuals are short­term, self­interested "rational" actors, seeking to maximize their own gains. Such actors will exploit commons (have more babies, add more cattle to pastures, pollute the air) as long as they believe the costs to them individually are less than the benefits. ­ When every individual believes and behaves in this manner, commons are quickly filled, degraded, and ruined along with their exploiters (Ostrom, 1994 Rules, Games, and Cornmon­Pool Resources, pg 5). Hardin suggests several solutions (Hardin, 1968 The Tragedy of the Commons, pg 3.):

a. Sell them [commons] off as private property.

b. Keep them as public property, but allocate the right to enter them. The allocation might be:

i. On the basis of wealth, by the use of an auction system.

ii. On the basis of merit , as defined by some agreed­upon standards.

iii. By lottery.

iv. By first­come, first­served basis, administered to long queues.

Olson's logic of collective action (1965): Concentrated minor interests will be overrepresented and diffuse majority interests trumped, due to a free­rider problem that is stronger when a group becomes larger. The free rider problem occurs when those who benefit from resources, goods, or services do not pay for them, which results in an under­provision of those goods or services. Large groups have problems providing common goods for three reasons:

a. Each group member has a lower share of the benefits;

b. so it's less likely that anybody's benefits of helping provide the good

c. and organizational costs rise with group size.

The Prisoner's Dilemma Game: The simple structure of the Prisoner's Dilemma game is a useful device for demonstrating the conflict between individual rationality and group rationality. When individuals withdraw scarce resource units from the same CPR, when they cannot communicate and established agreed­upon rules and strategies, and when no other authority has established and enforced effective rules, predictions of suboptimal use of the resource are likely to be correct. Users will over­appropriate, individuals will defect on one another, and potential collective benefits will not be achieved (Ostrom, 1994 Rules, Games, and Cornmon­Pool Resources, pg 5).

11

What are collective action problems and which two types have been identified in the conventional CPR literature? (slides; Ostrom et al. 1994)

Appropriation Problems: -can be conceptualized as either one-shot static situations or as iterated, time-independent situations. It is most fundamental form, the solution to the problem of the efficient level pf appropriation delas simply with equating the marginal costs of appropriation with the marginal returns from appropriation. Its applied appropriation externalities, assignment problems, and technological externalities to differentiate these problems.

Appropriation externalities: one user's increased appropriation reduces the yield obtained by other users for any given level of  appropriation activity.

Assignment problems: in many CPR situations, frequent conflict occurs over access to the good patches, or a wide diversity of local rules are used to give a clear order.

Technological Externalities: Changing the assumption regarding the presence of a homogeneous technology

creates a. technological externality when the use of one technology increases the costs(or productivity) for the users of other technologies.

Provision Problems: -focus on the behavioural incentives for appropriators to (a) alter appropriation activities within an existing CPR that alters the productive capacity of the resource, demand-side provision, or (b) contribute resources for the provision or maintenance of a CPR, supply-side provision. Depending on the specific characteristics of the situation, provision problems may be represented as one shot games, time-independent repeated games, or time-dependent repeated games. For most CPR problems, the most natural representation is a time-dependent repeated game.

Demand Side: The source of demand-side provision problems is the way in with appropriation impacts on the productive capacity of the resource. E.g. increased fishing beyond some critical level will reduce fish stock to the extent that the productivity capacity of the fishery is reduced.

Supply Side: Conceptually, the supply-side PR situation parallels the theoretical and empirical literature focusing on public-goods provision. Similar to pure public good provision, maintenance or provision of a CPR facility may suffer from free riding because it is difficult to monitor or prevent access. A classic supply-side provision problem is that of the maintenance required to keep an irrigation system operating effectively.

The nature of the appropriation problem is affected by how well the provision problem is solved.

12

Which policy prescriptions characterized early theory on CPR management? (slides; Ostrom 2002)

Theorists assume that regulators will act in the public interest and understand how ecological systems work and how to change institutions as to induce socially optimal behaviour. Until recently, the possibility that appropriators themselves find ways to organise themselves has not been seriously considered.

Policy prescriptions that characterised early theory of CPR management where:

Government ownership

Privatisation (Private Property)

Blueprints: blueprint thinking occurs whenever policymakers, donors, citizens or scholars propose uniform solution to a variety of problems

Community organisation

The conventional theory presumed that external authorities were needed to impose new rules onto this appropriators trapped into producing excessive externalities. However, Ostrom argues that officials and policy makers have different motivations and thus won’t succeed in finding the optimal policy because they are not directly involved. They also have little capability to adapt and learn in light of information about outcomes resulting from their policies.

13

What have been the main drivers of the cooperative movement historically and currently and how those drivers are related to different types of cooperatives? (slides)

When cooperative movements started at the end of the 18th century, inspired by such events as the French Revolution (Liberty, Brotherhood, Equality and the emergence of the “individual”), the main drive was the pressure resulting from poverty, wars, crises, famines and a growing population. In Germany pioneers were Friedrich Wilhelm Raiffeisen, who declared “all for one – one for all” and was involved in rural and credit cooperatives. Another pioneer was Hermann Schulze-Delitzsch who was a lawyer and worked on the law concerning this domain. Wilhelm Haas also was a social reformer.

Why did Cooperatives emerge?

  • poverty; insecurity and inability of individuals to cover sudden expenditures e.g. burial cooperatives
  • covering basic needs, avoiding exploitation e.g. housing cooperatives and consumer cooperatives
  • market integration: still in developing countries
  • countervailing power on markets e.g. agricultural marketing cooperatives for dairy and cereals
  • quality improvements e.g. horticultural cooperatives
  • exploiting economies of scale e.g. machine rings
  • transaction costs e.g. credit cooperatives
  • lacking interest of firms e.g. electricity coops

Def.: A coop is a group of member owners. “A cooperative is a business. Co-ops range in size from small strode-fronts to large companies. In many ways, they are like any other businesses, but in several important ways they are unique and different.” (NCBA 2005)

Principles:

Owners patronage:

  • when cooperatives general margins from efficient operations and add value to products, these earnings are returned to members in proportion to their use of the cooperative. Without the cooperative, these funds would go to other middlemen or processors.
  • each year a cooperative computes the earnings on business conducted on a cooperative basis. Those earnings are retuned to the patrons (cash or equity) on the basis of how much business each patron did with the cooperative. These distributions are called patronage refunds.
  • Example: if a cooperative has earnings from business conducted on a cooperative basis of $20,000 for the year, and Ms. Jones does 2% of that business with the cooperative, she receives a patronage refund of $400 ($20,000x0.02).

Design Principles:

  • essential principle: member promotion
  • identity principle: member=owner=(customer)
  • organisational principles: S-principles (self-help, self-responsibility, self-organisation)
  • variable principles: rules of conduct e.g. voting, representation, openness, regionality

Attributes:

  • owned and democratically controlled by their members
  • people who use the coop’s services or buy its goods
  • not outside investors
  • coop members usually elect their board of directors from within the membership
  • return surplus revenues (income over expenses and investment) to members proportionate to their use of the cooperative —> not proportionate to their “investment” or ownership share
  • are motivated not by profit, but by service to meet their members’ needs for affordable and high quality goods or services
  • exist to serve they members
  • pay taxes on income kept within the coop for investment and reserves
  • surplus revenues from the coop are retuned to individual members who pay taxes on that income (patronage refund)
  • how do you know that this holds true?
  • auditing is obligatory and demanded by cooperative law!

14

The design and behavior of cooperatives is supposed to follow particular principles (i.e., set by the International Cooperative Alliance). Please discuss these principles and indicate how those principles are similar to Ostrom’s (1990) design principles. (slides; Ostrom 2005; ICA webpage)

Cooperatives (should) follow internationally recognized principles (ICA):

  1. Voluntary and Open Membership
  2. Democratic Member Control
  3. Member Economic Participation
  4. Autonomy and Independence
  5. Education, Training and Information
  6. Cooperation Among Cooperatives (e.g. between countries)
  7. Concern for Community

One of the design principles by Ostrom is Collective-Choice Arrangements. Most individuals affected by operational rules can participate in modifying operational rules and that is similar to Cooperation among cooperatives and democratic member participation, as well as to the concept of autonomy and independence of this coop from sanctions, rules and norms. The principle of Congruence - the distribution of benefits from appropriation rules is roughly proportionate to the costs imposed by provision rules. That is precisely how a coop works, by member economic participation. And also by Conflict-Resolution Mechanisms, trying to be solved by the members of a coop. Finally, the principals that a coop should follow are very similar to those design principles (element or condition that helps to account for the success of these institutions in sustaining the [common-pool resource] and gaining the compliance of generation after generation of appropriators to the rules in use)proposed by Ostrom.

Seven internally recognised cooperative principles (ICA):

  1. voluntary and open membership: Co-operatives are voluntary organisations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.
  2. democratic member control: Co-operatives are democratic organisations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary co-operatives members have equal voting rights (one member, one vote) and co-operatives at other levels are also organised in a democratic manner.
  3. member economic participation: Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.
  4. autonomy and independence: Co-operatives are autonomous, self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy.
  5. provision of education, training and information: Co-operatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives. They inform the general public - particularly young people and opinion leaders - about the nature and benefits of co-operation.
  6. cooperation among cooperatives: Co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional and international structures.
  7. concern for the community: Co-operatives work for the sustainable development of their communities through policies approved by their members.

Ostrom’s Design Principles:

1. Clearly Defined Boundaries

Individuals or households with rights to withdraw resource units from the commonpool resource and the boundaries of the common-pool resource itself are clearly defined.

2. Congruence

A. The distribution of benefits from appropriation rules is roughly proportionate to the costs imposed by provision rules.

B. Appropriation rules restricting time, place, technology, and/or quantity of resource units are related to local conditions.

3. Collective-Choice Arrangements

Most individuals affected by operational rules can participate in modifying operational rules.

4. Monitoring

Monitors, who actively audit common-pool resource conditions and appropriator behavior, are accountable to the appropriators and/or are the appropriators themselves.

5. Graduated Sanctions

Appropriators who violate operational rules are likely to receive graduated sanctions (depending on the seriousness and context of the offense) from other appropriators, from officials accountable to these appropriators, or from both.

6. Conflict-Resolution Mechanisms

Appropriators and their officials have rapid access to low-cost, local arenas to resolve conflict among appropriators or between appropriators and officials.

7. Minimal Recognition of Rights to Organize

The rights of appropriators to devise their own institutions are not challenged by external governmental authorities.

For common-pool resources that are part of larger systems:

8. Nested Enterprises

Appropriation, provision, monitoring, enforcement, conflict resolution. and governance activities are organized in multiple layers of nested enterprises

15

Which types of questions did neoclassical economics scholars addressed in the study of cooperatives? (slides; Ortman and King 2007)

According to the neoclassical theory of the firm, each firm maximizes its profits subject to its cost structure and product demand constraints. Transaction costs (i.e., costs of obtaining information about alternatives and costs of negotiating, monitoring, and enforcing contracts) are assumed to be zero, as are adjustment costs, and resources are privately held and fully allocated among alternative uses purely in response to financial incentives. How a firm would behave under different circumstances can be hypothesized by analyzing how changes in the firm’s constraints affect its profits. Criticism of the neoclassical model of the firm was based on the assumption of profit maximization but, more fundamentally, that the model does not explain why these firms exist in the first place, and how the resources within these organizations are employed, allocated, and motivated to achieve maximum profits (Royer, 1999; Sykuta and Chaddad, 1999). Sykuta and Chaddad (1999: 69) contend that criticism of neoclassical economics also extends to the study of markets because it is “ill suited to answering questions about when, why, and how markets evolve; about the institutional infrastructure required to support market activity; and about the structures of the organizations involved in market activity.”   The criticisms of the neoclassical paradigm led to the development of alternative models of the firm based on other assumptions (e.g., maximizing rate of growth, sales, and firm size subject to a profit constraint), focusing on The role of positive transaction costs and variable property rights has given economists new insights into the existence of firms (including cooperatives). (Ortman and King 2007)

The model made a major contribution to understanding the internal economics of cooperatives with a conception of the cooperative as a form of vertical integration, and a focus on the structural and functional relationships of members to their cooperative marketing organisation. A cooperative enterprise should be treated as a firm (a decision-making entity) or as an organisation (aggregation) of economic units.

According to the theory each firm maximises its profits subject to its cost structure and product demand constraints. Transaction Costs are assumed to be zero and resources are privately held and fully allocated among alternative uses purely in response to financial incentives.

How a firm would behave under different circumstances can be hypothesised by analysing how changes in the firm’s constraints effects profits.

Limitations: does not explain why the form exists in the first place, and how the resources within these organisations are employed, allocated, and motivated to achieve maximum profits.

In neoclassical theory property is privately held, exclusive and transferable on a voluntary basis. Since TC are zero property rights can be fully defined, allocated, enforced and will be allocated to those uses where they yield the highest return.

16

Which are the problems identified by institutional economists vis a vis the sustainability of traditional cooperatives? (slides; Chaddad and Cook; Ortman and King 2007)

The traditional cooperative structure and the investor-oriented firm (IOF) are seen as polar form of organization. Additionally are identified five non-traditional cooperative models, considered departures from the traditional cooperatives structure because they relax some or, in the limit, all restrictions on traditional cooperative ownership rights. Those new organizational models are pursing because investment constraints arise in agricultural cooperatives as a result of free rider, horizon, and portfolio problems,  which in turn emerge because ownership rights are stricted to the members, are non-transferable, redeemable, and have benefit distribution proportional to usage rather than member investment. As a result, coops members lack necessary incentives to invest in traditional coops because their investment is illiquid and does not receive adequate returns. Risk-bearing costs are too high. And relaxing some of there restrictions on ownership rights, nontraditional coops may provide incentives for member and nonmember investment in organization-specific assets thereby ameliorating perceived financial constraints (Chaddad and Cook, 2004).

The widespread debates on the future of cooperatives raise the question of whether conventional cooperatives are the appropriate organizational form that small-scale farmers in South Africa could use to facilitate access to input and product markets. Several large cooperatives in South Africa have also converted to IOFs due to the loss of government support and to avoid the problems inherent in conventional cooperatives (Ortman and King, 2007).

1. Free­rider Problem

  • arises when individuals don't bear the full cost of their actions or receive the full benefits they create (e.g. because property rights are not tradeable or well defined)
  • often associated with conventional cooperatives
  • internal free rider problem (the common pool property problem)

          new members receive the same patronage and residual rights as existing members, but don't need to make front investments proportionate to their use

          decisions are supported that increase cash flows per member ­> existing members don't want to invest into their cooperative anymore (dilution of returns)

  • external free rider problem

­          when cooperative provides its members with collective goods from which others almost can't be exluded ­> no or suboptimal provision of this good (e.g. non member  producer benefits from the terms of trade negotiated by a cooperative)

2.   Horizon Problem

when a member’s residual claim on the net income generated by an asset is shorter than the productive life of that asset. member is likely to under­invest in the asset ­> a consequence is that cooperatives will tend to under­invest in assets with long­term payoffs (e.g., research and development, and marketing).

3.  Portfolio Problem

·    members invest in the cooperative in proportion to their use and because equity shares in the cooperative generally cannot be freely purchased or sold ­ > members are unable to diversify their individual investment portfolios according to their personal wealth and preferences for risk taking ­> suboptimal investment portfolios + members who have to accept more risk than they prefer will pressure the board of directors and managers to reorganize the cooperative’s investment portfolios to reduce risk, even if this means lower expected returns

4.   Control Problem

· divergence of interests between the principal (e.g., cooperative members and their representative board of directors) and the agent (management) ­> principal­agent problems

5.  Influence cost Problem

· in a cooperative involved in a wide range of activities, diverse objectives among its members can result in costly influence activities (direct costs of influence activities and the costs of poor decisions in terms of misallocation of resources)