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«n. The case of accumulation and use of common resources in mutual benefit organizations Ermanno C. Tortia n. 12/2011 The firm as a common. The case ...»

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The firm as a common.

The case of accumulation

and use of common

resources in mutual benefit

organizations

Ermanno C. Tortia

n.

12/2011

The firm as a common.

The case of accumulation and use of common resources in mutual

benefit organizations.

Ermanno C. Tortia

University of Trento, Department of Economics

ermanno.tortia@unitn.it

Abstract

Common resources are quasi-public resources, which are rivaled but non excludable in

consumption or in appropriation. While the exploitation of common resources has been widely studied in the literature originated by Elinor Ostron’s works (starting from 1990), the study of common resources inside entrepreneurial organization in not sufficiently developed to date. This paper establishes three dimensions that highlight the relevance of the communality of resources in entrepreneurial organizations: the accumulation and use of common capital resources owned by the organization; the distribution of a rivaled, but non excludable value added among the controlling patrons;

and the management of common non-owned resources (for example natural resources) by the organization. The first theme is selected and developed further. Cooperative firms are introduced are instance of ownership form that appears, historically and institutionally, to be particularly keen to accumulate, use, distribute common resources.

Key words: common resources; rivalry; non-excludability; entrepreneurial organizations; accumulation; cooperative firms.

♣ This study is part of the research titled “The use of common resources in cooperative firms. A comparative enquire in Scotland and the Trentino Province”. The research programme was financed in year 2010 by the Autonomous Province of Trento, whose support I here acknowledge.

I am indebted for precious comments and suggestions to Anthony Jensen, Cacilia Navarra, Carlo Borzaga and to the other participants at the symposium “Advancing the Cooperative Movement in Australia and Italy” held in July 2011 in Trento and organized by European Research Institute on Cooperative and Social Enterprises (EURICSE) at Trento University, jointly with the Cooperative Research Group at Sidney University. I am also very indebted to Ugo Pagano for the discussion of my paper during the session “Institutions and Cooperation” at the annual conference of the Italian Society of Law and Economics at Turin University, December 2011.

1. Introduction The study of the management of common resources became prominent over the last decades in the economic literature in correspondence with the mounting evidence of the necessity to achieve sustainability in the exploitation of natural resources. Governance mechanisms and conflict resolution procedures came under closer scrutiny as key elements allowing to overcome the well-known tragedy of the commons problem (Hardin, 1968). Most of the literature on common-pool resources came to concentrate on forms of communal ownership that cannot be assimilated neither to public, nor to private ownership (Ostrom, 1990). Communal ownership usually implies the right to exploit the stock of resources without depleting their ability to generate equivalent flows of resources in the future (e.g.

exploitation of rain forests for wood production) (Ostrom, 1990, p. 30). Communal ownership implies the non-excludability from consumption or appropriation of rivaled resources by the controlling constituencies. At the same time, non-controlling subjects are excluded from the exploitation of the resource. Common ownership appears as private ownership to people excluded from their utilization, while they are non-excludable, but rivaled for people participating to their utilization.1 Institutional contrivances are devised to exclude the subjects not pertaining to the relevant constituencies of appropriators while, at the same time, processes of definition of the appropriation rights of the included patrons are observed.

Both theoretical and empirical studies have highlighted the fact that, given the rivalry and non-excludability of common pool resources, conflict over their appropriation is unavoidably endemic. Technologies and governing rules serve the function of regulating appropriation while limiting conflict and punishing defectors (Ratner et al., 2010). This is achieved not only through control and punishment of defectors, but also through coordination mechanisms stressing the importance of stakeholder involvement (Meinzen-Dick et al., 2006; Poteete et al.,

2010) for example in the definition of appropriation rights and in patrolling their realization.

The analysis of the exploitation of common-pool resources has been mainly limited, to date, to the study of natural resources. However, it is possible to envisage that the same analysis is applied to other economic domains, for example to the organization of production in entrepreneurial organization. The paucity of analysis in this field may be due to the concentrated (private or public) nature of ownership in most business organization, a feature that, as we shall see, limits the economic relevance of resources communality. This study endeavors to single out three relevant dimensions for the study of common pool resources in

entrepreneurial organizations:

• the accumulation and use of common capital resources: all business organization need to accumulate owned capital resources in order to self-finance investments and to build collateral guarantees offered to external financiers. The use of these resources can be characterized by communality when decisions about investments are taken in collectively by the controlling patrons. When investments are at least partially sunk (the exit option is costly) and the controlling members can have heterogeneous and/or conflicting objectives, the rivaled and non-excludable nature of common capital resources becomes relevant;





Wikipedia defines common-pool resources as it follows: “In common property regimes, access to the resource is not free, and common-pool resources are not public goods. While there is relatively free but monitored access to the resource system for community members, there are mechanisms in place which allow the community to exclude outsiders from using its resource. Thus, in a common property regime, a common-pool resource appears as a private good to an outsider and as a common good to an insider of the community. The resource units withdrawn from the system are typically owned individually by the appropriators. A common property good is rivaled in consumption”.

• the distribution of a rivaled, but non excludable value added: the remuneration of the factors of production is always rivaled given the production of a limited value added.

This implies that a higher remuneration of some specific subjects or of one specific group of patrons necessarily implies a lower remuneration of other patrons. At the same time, distribution is often characterized by a relevant degree of nonexcludability. This happens, for example, when the remuneration of labor services or the setting of prices is informed by equity criteria;

• the management of common natural, historical and cultural resources: in some specific instances business organizations can find themselves to manage for commercial purposes resources that have public relevance (e.g. natural resources or the cultural and historical patrimony). In this case non-excludability is given by the public relevance of the resources that dictates that the resources is not depleted or otherwise spoiled.

The most widespread ownership forms in contemporary economies are the public and the private for-profit ones. To this, the cooperative, or mutual benefit form of ownership is to be added, since it represent a third typology whose diffusion is limited, but not marginal.2

1.1. The utilization of common-pool resources in private for-profit and publicly owned firms In private for profit firms capital resources can show a high degree of communality when the firm is owned as a joint stock company. In this case the capital of the firm is managed in common by stockholders, and its use is rivaled, but non-excludable. The sunk nature of specific investments makes communality an enduring feature in the life of the entrepreneurial venture. Commonality of capital resources in for profit firms is not to be considered, however, a generalized phenomenon, but rather it involves only a subset of this firm category since a high percentage of for profit firms show concentrated and exclusive ownership. In this case commonality of capital ownership3 can be considered absent since all the relevant decisions concerning the accumulation and use of capital resources are taken by one or by a limited set of subjects. When only decision maker is present, rivalry in the utilization of resources is absent, while all the other stakeholders of the organization are understood as contractual parties who are excluded from decision concerning the utilization of the resources. Furthermore, even in the presence of pronounced phenomena of rivalry and nonexcludability, stockholders in for-profit firms can transfer the ownership of shares at any time. That is, the exit option can compensate and counterbalance the growth of governance costs connected with common ownership. As it will better emerge in the following sections, a new institutionalist interpretation of this phenomenon dictates that concentrated ownership is understood as an effective way to eschew the costs of governance connected with the rivaled and non-excludable nature of common ownership. Communality in the distribution of value added in private for-profit firms is limited, but important as well. On the one hand, nonA fourth typology of ownership, the social or public benefit one, may be added when dealing with not-forprofit entrepreneurial organizations which have an entrepreneurial character (Weisbrod, 1988; Hanmann, 1996).

This fourth case will be taken into consideration as well, but in a more tangential way since is it thought to represent a newer and less well defined form of ownership.

The most widespread definitions of ownership of an assets concern residual rights of control and appropriation of the net residual, implying also that the asset is at the owner disposition for sale, conversion or elimiation (Hansmann, 1988). In this study, when dealing with common ownership, reference is made to residual control rights and to the appropriation of the proceedings coming from the owned assets, in a way similar to usufruct rights. As it is better explained in the following section, common ownership excludes in most cases the freedom to sell, eliminate or convert the asset.

excludability can be connected with bargaining between different stakeholders (most often investors, customers, and employees) over the distribution of the value added. On the other hand, some stakeholders can be remunerated of the basis of “equity” criteria, more than on the basis of purely “efficiency” criteria. The example of worker remuneration can be put forward again, since equity criteria can determine a relevant degree of distributive nonexcludability in wage determination (Frank, 1984; Stark, 1990; Levine, 1991; Clark and Oswald, 1996).4 To be sure, the relevance of communality in distributive processes in forprofit firms is reduced by the lack of involvement in decision making of all the stakeholders other than investors (most often of employed workers and customers). The reason is that impoverished or absent involvement heightens the degree of distributive excludability.

Finally, the role of for profit firms in managing natural and cultural resources can be considered limited, since their utilization is often unprofitable for commercial purposes (Weisbrod, 1988).

The role of publicly owned enterprises in the accumulation, distribution and use of common capital resources is to be considered limited as well. Public ownership of production activities excludes, as a rule, the existence of net residuals or their appropriation by the controlling stakeholders. Distributive processes are, in terms of communality of resources, similar to the case of for-profit firms since most stakeholder, apart from the public controlling authority, are only weakly involved in these processes (one example of such involvement concerns the existence of public sector labor unions). Finally, public management of common natural and cultural resources is often not understood as an entrepreneurial venture, but as a simpler administrative service. Hence it falls outside the boundaries of this study.

1.2. Common pool resources in cooperative, mutual benefit enterprises The organizational forms have shown the greatest compatibility with the interpretation of the firm as a nexus of a common-pool resource are mutual benefit organizations, mainly cooperative firms. In mutual benefit organizations, both historically and in institutional terms, the communality of resources appears central in all three areas of concern of this study: 5 The accumulation and use of common capital resources: Most existing cooperative forms accumulate all or a relevant part of their surpluses in indivisible reserves of capital (asset lock or trust funds). This is primarily done in order to self-finance investments, to build collateral guarantee, and to insure members against future negative contingencies (Navarra, 2010). Democratic governance underpins both a high degree of rivalry and non-excludability in the use of capital assets accumulated by means of indivisible reserves: different members of groups of members may prefer Among the most classical studies on equity in wage determination, Frank (1984) argued that egalitarian internal wage structures arise because of “equity” considerations, a concept that he equates with that of status;

Stark (1990) took account of relative status deprivation in order to explain why workers are usually not paid their marginal product; Levine (1991) argued that group cohesiveness and lower wage dispersion increase efficiency in participatory firms, thereby explaining involuntary unemployment among blue collars, who are paid above-market wages in order to boost their compliance with the firm’s objectives. In some studies, worker satisfaction as a proxy for individual well-being has been connected with distributive fairness taking the form of comparison wage rates (Clark and Oswald, 1996).



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