The empirical cases presented so far have been success stories. Given the presumption of failure that characterizes so much of the policy literature, it is important to present examples of success. Now the time has come to examine several cases of outright failure and cases in which the institutions designed by appropriators are in a fragile condition.

Near Alanya, Turkey, where fishers were able to establish their own set of rules for regulating inshore fisheries, there are two other fishing areas whose fishers have failed to establish effective rule systems – Bodrum and the Bay of Izmir. Both suffer severe problems of overcrowding and rent dissipation. In San Bernardino County, California, groundwater pumpers are still facing overdraft conditions even after they initiated litigation and created a special district. The institutional arrangements described in Chapter 4 that helped nearby basins solve CPR problems did not work as effectively when applied to a region rather than to a basin.

In another part of the world, Sri Lankan fishers, who had devised an ingenious system for rotating access to an inshore fishery, found themselves unable to enforce an additional rule to prevent the entry of new appropriators. The rotation system continues to spread the risk involved in an uncertain environment across all participants. With too many appropriators, however, the profits obtained by local fishers have steadily declined as rents have been dissipated.

In the interior of Sri Lanka, central-government authorities and donor countries have invested large sums in the reconstruction of major irrigation systems.

The Cambridge series on the Political Economy of Institutions and Decisions is built around attempts to answer two central questions: How do institutions evolve in response to individual incentives, strategies, and choices, and how do institutions affect the performance of political and economic systems? The scope of the series is comparative and historical rather than international or specifically American, and the focus is positive rather than normative.

In this pioneering book Elinor Ostrom tackles one of the most enduring and contentious questions of positive political economy, whether and how the exploration of common-pool resources can be organized in a way that avoids both excessive consumption and administrative cost. These cases, where a resource is held in common by many individuals – that is, well-defined individual property rights over the resource are absent – are often held by economists to be exploitable only where the problem of over-consumption is solved by privatization or enforcement imposed by outside force. Ostrom, by contrast, argues forcefully that other solutions exist, and that stable institutions of self-government can be created if certain problems of supply, credibility, and monitoring are solved. She provides a close study of a uniquely broad range of cases, including high mountain meadows in Japan and Switzerland, water projects in the Philippines and California, and fisheries in Canada and Turkey. Some of these cases involve stable institutions; in other cases the institutions were fragile and failed.

A direct attack on several of the key questions posed in this book can be launched by an examination of field settings in which (1) appropriators have devised, applied, and monitored their own rules to control the use of their CPRs and (2) the resource systems, as well as the institutions, have survived for long periods of time. The youngest set of institutions to be analyzed in this chapter is already more than 100 years old. The history of the oldest system to be examined exceeds 1,000 years. The institutions discussed in this chapter have survived droughts, floods, wars, pestilence, and major economic and political changes. We shall examine the organization of mountain grazing and forest CPRs in Switzerland and Japan and irrigation systems in Spain and the Philippine Islands.

By indicating that these CPR institutions have survived for long periods of time, I do not mean that their operational rules have remained fixed since they were first introduced. All of the environmental settings included in this chapter are complex and have varied over time. In such settings, it would be almost impossible to “get the operational rules right” on the first try, or even after several tries. These institutions are “robust” or in “institutional equilibrium” in the sense defined by Shepsle. Shepsle (1989b, p. 143) regards “an institution as ‘essentially’ in equilibrium if changes transpired according to an ex ante plan (and hence part of the original institution) for institutional change.”

In Chapter 1, I described my strategy as that of a “new institutionalist” who has picked small-scale CPR situations to study because the processes of self-organization and self-governance are easier to observe in this type of situation than in many others. The central question in this study is how a group of principals who are in an interdependent situation can organize and govern themselves to obtain continuing joint benefits when all face temptations to free-ride, shirk, or otherwise act opportunistically. Parallel questions have to do with the combinations of variables that will (1) increase the initial likelihood of self-organization, (2) enhance the capabilities of individuals to continue self-organized efforts over time, or (3) exceed the capacity of self-organization to solve CPR problems without external assistance of some form.

This chapter has several objectives. First, I define what I mean by CPRs and how I view individual behaviors in complex and uncertain CPR situations. Then I examine the general problem facing individuals in CPR situations: how to organize to avoid the adverse outcomes of independent action. This general problem is solved by external agents in two well-accepted theories: the theory of the firm and the theory of the state. These explain how new institutions are supplied, how commitments are obtained, and how the actions of agents and subjects are monitored effectively, using in one case the firm, and in the other state, as an organizational device.

It is difficult to say when I began work on this study. If one asks when I first began to study problems of collective action faced by individuals using common-pool resources, then identifying the beginning is easier. In the early 1960s, I took a graduate seminar with Vincent Ostrom, who was to become my closest colleague and husband. The seminar focused on the development of institutions related to water resources in southern California. I began my dissertation focusing on the entrepreneurship involved in developing a series of public enterprises to halt the process of saltwater intrusion into a groundwater basin underlying a portion of the Los Angeles metropolitan area. A fellow graduate student, Louis Weschler, conducted a parallel study in an adjacent groundwater basin that adopted different institutional arrangements to cope with similar problems. As Weschler and I completed our studies, it appeared that both institutional arrangements had been successful in enabling the water producers to avoid the catastrophic economic loss that would have occurred if both basins had been inundated by the Pacific Ocean (E. Ostrom 1965; Weschler 1968).

In the late 1960s, Vincent and I participated in the Great Lakes Research Program initiated by the Batelle Memorial Institute (V. Ostrom and E. Ostrom 1977b), but most of my work as a young faculty member focused on problems of urban service delivery and public economies in metropolitan areas. In 1981 I was asked by Paul Sabatier, a colleague for a year at the Center for Interdisciplinary Research at the University of Bielefeld, to make a seminar presentation on “organizational learning.”

In the preceding chapter I examined institutions for governing CPRs in which appropriators have devised governance systems that have survived for long periods of time in environments characterized by considerable uncertainty and change. Although the particular problems involved in governing mountain commons vary from those involved in governing irrigation systems, all of these long-enduring institutional arrangements have shared commonalities. These cases clearly demonstrate the feasibility (but obviously not the likelihood) of robust, self-governing institutions for managing complex CPR situations, but the origins of these systems are lost in time. It is not possible to reconstruct how earlier users of Swiss alpine meadows, Japanese mountain commons, the Spanish huertas, or the Philippine zanjeras devised rules that have survived such long periods. We do not know who originated or opposed various proposals, or anything about the process of change itself.

A study of the origins of institutions must address the problem of supply raised in Chapter 2. As Bates (1988) points out, the presence of collective benefits as a result of designing new institutions is itself a second-order collective dilemma. A proposed new institution “is subject to the very incentive problems it is supposed to resolve” (Bates 1988, p. 395). Many questions need to be addressed. How many participants were involved? What was their internal group structure? Who initiated action? Who paid the costs of entrepreneurial activities? What kind of information did participants have about their situation?

In Chapter 1, I discussed three models that are used to justify the policy recommendation that external governmental authorities should impose solutions on individuals who jointly use CPRs: Hardin's tragedy of the commons, the prisoner's dilemma game, and Mancur Olson's logic of collective action. All three models lead to the prediction that those using such resources will not cooperate so as to achieve collective benefits. Further, individuals are perceived as being trapped in a static situation, unable to change the rules affecting their incentives.

The cases presented in this study are from a universe of relatively small scale CPRs (the largest involves about 15,000 appropriators), each located within a single country. The appropriators in these cases are heavily dependent on a flow of scarce resource units for economic returns. The cases illustrate that some, but not all, appropriators in these settings solve what are thought to be second-order dilemmas to provide their own institutions. Various institutional arrangements are devised to accomplish these results. Marketable rights to the flow of resource units were developed in Alicante and in three of the California groundwater cases, but the resource systems themselves did not become private property. Forms of public instrumentalities were also used in the California groundwater cases and several other cases, but none of the success cases involved direct regulation by a centralized authority.

Most of the institutional arrangements used in the success stories were rich mixtures of public and private instrumentalities.

A good deal of literature on transaction costs takes enforcement as a given, assuming either that it is perfect or that it is constantly imperfect. In fact, enforcement is seldom either, and the structure of enforcement mechanisms and the frequency and severity of imperfection play a major role in the costs of transacting and in the forms that contracts take. There are two reasons why enforcement is typically imperfect. The first takes us back to the preceding chapters that explore the costs of measuring the multiple margins that constitute contract performance. The second rests in the fact that enforcement is undertaken by agents whose own utility functions influence outcomes.

In Chapter 4, asymmetries of information held by principals and agents about the valuable attributes of what was being exchanged were examined in the context of the wealth-maximizing behavior of the parties to exchange. In this chapter I wish to extend that analysis to explore the problems that arise in the transfer of rights. Parties to an exchange must be able to enforce compliance at a (transaction) cost such that the exchange is worthwhile to them. On the face of it, the problem sounds simple. Surely the gains from trade, which economists take to be the bedrock of economic performance, should make it worthwhile to evolve cooperative solutions among parties to capture jointly those gains. Indeed under certain circumstances, as I have noted in earlier chapters, the issues are so resolved. Trade does exist, even in stateless societies.

The theory of social situations is applied in this chapter to games in normal form. As in the case of cooperative games, I claim that here, too, the description of a social environment as a normal form game is not satisfactory. In particular, it does not provide any information concerning either the beliefs of the players or the availability of the legal institutions that specify, for example, whether self-commitments, communications with other players, or the signing of binding agreements are allowed. Accordingly, a normal form game can be associated with a number of situations.

Stable (both optimistic and conservative) standards of behavior for some of the situations we shall associate with normal form games yield several of the most important game theoretic solution concepts, such as Nash and strong Nash equilibrium. As was the case with cooperative games, this characterization of known solution concepts sheds new light on the negotiation processes, belief structures, and institutional assumptions that underlie them.

In addition, again as in the previous chapter, the proposed approach offers new solution concepts. For example, by representing a normal form game as a situation, it is possible to analyze the consequences of “open negotiations.” That is, in contrast to the Nash-type situations where individuals make their moves “secretly,” I consider the possibility that players state their decisions openly. (This is in the spirit of the negotiation process delineated by the vN&M situation; see Section 6.2.) I distinguish among four cases, depending on whether it is possible to make “contingent threats” or, rather, only “irrevocable commitments” and whether coalitions are permitted to form.

In Chapter 8, I moved from institutions and transaction costs to aspects of an economy's performance, excluding organizations from my analysis. In Chapter 1 I introduced the relationship between institutions and organizations, and I now return to it. Organizations and their entrepreneurs engage in purposive activity and in that role are the agents of, and shape the direction of, institutional change. I propose in this chapter to show how organizations induce change.

I begin by returning to the Coase (1937) argument that transaction costs are the basis for the existence of the firm. If information and enforcement were costless, it would be hard to envision a significant role for organizations. But they are not. What is the role of organization? The firm, a form of organization, has been considered a device to exploit the worker (Marglin, 1974), to overcome the problems of asset specificity and postcontractual opportunism (Williamson, 1975, 1985), and to reduce measurement costs in economic activity (Barzel, 1982).

Whatever the merits of these alternatives (and they are not altogether mutually exclusive), the focus in this study is on organizations as purposive entities designed by their creators to maximize wealth, income, or other objectives defined by the opportunities afforded by the institutional structure of the society.

In the course of pursuing those objectives, organizations incrementally alter the institutional structure.

The agent of change is the individual entrepreneur responding to the incentives embodied in the institutional framework. The sources of change are changing relative prices or preferences. The process of change is overwhelmingly an incremental one. I will put those separate elements together in this chapter.

Change typically consists of marginal adjustments to the complex of rules, norms, and enforcement that constitute the institutional framework. The overall stability of an institutional framework makes complex exchange possible across both time and space, and it will be useful to review the stability characteristics to improve our understanding of the nature of the incremental process of change.

Stability is accomplished by a complex set of constraints that include formal rules nested in a hierarchy, where each level is more costly to change than the previous one. They also include informal constraints, which are extensions, elaborations, and qualifications of rules and have tenacious survival ability because they have become part of habitual behavior. They allow people to go about the everyday process of making exchanges without having to think out exactly the terms of an exchange at each point and in each instance. Routines, customs, traditions, and conventions are words we use to note the persistence of informal constraints, and it is the complex interaction of formal rules and informal constraints, together with the way they are enforced, that shapes our daily living and directs us in the mundane (the very word conjures up images of institutional stability) activities that dominate our lives.

The purpose of this book is to offer a new and integrative approach, in the spirit of game theory, to the study of formal models in the social and behavioral sciences.

Following Proclus' aphorism that “it is necessary to know beforehand what is sought,” the objective of this first chapter is to convey the general ideas behind the proposed theory, and present some of its advantages; the rigorous definitions, complete explanations, the precise underlying motivation, and, of course, the formal results are provided in the next chapters. The reader should not, therefore, expect to master the theory and comprehend its ramifications by glancing at this chapter; its purpose is limited to give the heuristic gist of the theory.

The scope of the theory

The proposed theory applies to all those models in the social and behavioral sciences in which it is impossible to impose a course of action, or an alternative, on the individuals. Rather, I consider only those social environments in which a course of action can be recommended, or proposed, to the individuals, who are then free to accept or reject the proposal. (The source of the recommendation is inconsequential. It might be one, some, or all of the individuals, or, alternatively, the recommendation can be made by an “outside expert,” say the social scientist. The crucial point to recall is that the proposer is not a dictator; he has no power to enforce his recommendation.)