1. “Beyond Markets and States:
Polycentric Governance of Complex Economic Systems”
Elinor Ostrom
American Economic Review
June 2010, 100(3):
“A core effort is developing a more general theory of individual choice that recognizes the central role of trust in coping with social dilemmas…One size fits all policies are not effective.” p. 642
Agenda:
Polycentric?
MORE types of goods
The nature of man revisited yet again…
MORE types of property rights
Best practices for fostering cooperation
The goal of business….
Link to Nobel lecture:
Play to 4:00.

2. Polycentric?
The boss is not the only one with authority – you need to allocate decision rights to others. You also need to work with other independent businesses. Remember: contracts do NOT solve problems! Hopefully they identify what problems are likely and give you a recourse of LAST resort! Managing via contract is very costly and not very timely.

3. Beyond (Between) Markets and States
Businesses – Franchises, Public, Private,
Strategic alliances (auto, technology, food, fashion)
Cooperatives (farming, broadcasting)
Public/private partnerships (development, insurance)
Associations (business districts, natural resources)
Clubs, voluntary groups, campaigns, PTA
Markets – private goods with no externalities
State – everything else! – Note reference to Hobbes p. 642
Ostrom – but if I look at the world I see more different forms of organization!
“The dichotomous view of the world explained patterns of interaction and outcomes related to markets for the production and exchange of strictly private goods, but it has not been adequately accounted for internal dynamics within private firms. Nor does it adequately deal with the wide diversity of institutional arrangements that humans craft to govern, provide, and manage public goods and common-pool resources.” p. 642.

4. MORE types of goods Secretarial Support Insurer & Vendor Contracts
Chart from p. 645 with overlay picture examples from the hospital
Cath Lab
Electronic Medical Record

5. Example: Who will teach what classes when? Who? What? Where? When?
Why?
How?
Dean, Registrar, Department Chair, Professor
NOT the College President, Trustees
What professor, what class, what room,
What content and location on any given day
Office, Electronic documents
Web scheduling has increased coordination!
1-year prior, 1 semester prior,
Daily
Allocation of resources
Time and space
Negotiation among factions
NOT the same at all schools!

6. Example: What resources do we need to have a class?
Room
Dynamic
Knowledge
Cleanliness

7. Are Rational Individuals Helplessly Trapped in Social Dilemmas?
“The classic assumptions about rational individuals…hide the potentially productive efforts of individuals and groups to organize and solve social dilemmas…The classic models have been used to view those who are involved in a prisoner’s dilemma game or other social dilemmas as always trapped in the situation without capabilities to change the structure themselves” (p. 648).

8. The Nature of Man revisited again…
Neoclassical Economics
“Economic Man”
Transaction Cost Economics
“Bounded Rationality”
Institutional Economics
Capacity for Learning and Collective Action
“…like the US Cavalry in a good Western, the government stands ready to rush to the rescue whenever the market ‘fails’…Private individuals, in contrast, are credited with little or no ability to solve collective problems among themselves. This makes for a distorted view of some important economic and political issues.”
Rober Sugden (1986) quoted in Ostrom (2010) on p. 649

9. “When boundedly rational individuals do interact over time…they learn more accurate information about the actions they can take and the likely actions of other individuals” (p. 659).
“Simply assuming that humans adopt norms, however, is not sufficient to predict behavior….observed behavior may vary by context because the perception of the ‘right thing’ would change” (p. 660).
“…the updated theoretical assumptions of learning and norm-adopting individuals can be used as the foundation for understanding how individuals may gain increased levels of trust in others, leading to more cooperation and higher benefits with feedback mechanisms that reinforce positive or negative learning…” (p. 660).
NOTE: “the right thing” goes back to clear communication of organizational strategy!
Also p. 661: “Social scientists also need to recognize that individual behavior is strongly affected by the context in which interactions take place rather than being simply a result of individual differences” – not just the nature of man but the nature of organizations, cultures, communities.
“Thus, it is not only that individuals adopt norms, but also that the structure of the situation generates sufficient information about the likely behavior of others to be trustworthy…” (p. 660).

10. How do we get people to contribute their best effort to a common objective?
“In CPR dilemmas where individuals do not know one another, cannot communicate effectively, and thus cannot develop agreements, norms and sanctions, aggregate predictions derived from models of rational individuals in noncooperative games receive substantial support.”
Communication is feasible with the full set of participants
2. Reputation of the participants are known
3. High marginal per capita return – stakes and incentives
4. Entry and exit capabilities
5. Longer time horizons
6. Agreed-upon sanctioning capabilities
P. 650 – 651
Like the pre-requisites for perfect competition, these are the pre-requisites for perfect cooperation!
Take inventory of what features your organization does and does not have. The more you have, the more you can aim for participatory self-governance. The less you have, the more ridgid (and costly) command and control you will need.
p. 664 “The surprising but repeated finding that users of resources that are in relatively good condition – or even improving – do invest in various ways of monitoring one another relates to the core problem of building trust.”

11. What is “Cheap Talk”?
“The opportunity for repeated face-to-face communication was extremely successful in increasing joint returns…Findings…are consistent with…the impact of face-to-face communication on the capacity of subjects to solve a variety of social dilemma problems. p. 655

12. MORE types of property rights
 Access
 Withdrawal
 Management
 Exclusion
 Alienation
What do we talk about… how to manage common pool resources!
Access and withdrawal can get combined when you are not talking about something like walking through a field.
What we may have considered “management” now becomes “exclusion” – the right to decide who has management rights
Management still typically does not have alienation rights unless owner-managed
All these rights are generally subsumed under alienation in Markets. Given by regulation/administrative authority in states. You need to specify them in your allocation of decision rights in your organizational architectures!

13. Example: What are the rights associated with classrooms and who has them?
Access
Withdrawal
Management
Exclusion
Alienation
The right to enter the room
Students enrolled in the class, professor, administration (limited)
The right to take things (desks, computer) out of the room
Professor (temporarily), facilities, administration
The right to change the way the room looks and is used
Professor (temporarily), facilities, administration
The right to decide who can enter the room
Registrar, professor, administration
The right to sell (rent) the room and capture the proceeds $$
Board of Trustees delegated to administration & facilities
Try this: client lists, vendor networks, computer servers & software

14. Best Practices (p. 653)…Applied to Business
1A,B: User and resource boundaries
Allocation of decision rights
2A,B: Congruent & Appropriate
Architecture in the context of the rules of the game.
3: Collective Choice – participation in making & modifying rules
Management, leadership and corporate culture
4A,B: Monitoring users and resources
Observability and accountability of individuals to outcomes
5,6 Graduated Sanctions & Conflict Resolution Mechanisms
Job descriptions, performance reviews & management
7: Minimal recognition of rights
Management recognizes employee “rights” to make their own rules within clearly defined spheres of decision rights.
8: Nested Enterprises
All decisions are not made by the CEO!
Some of these we’ve talked about, and some we are going to talk about more. All should be kept in mind as you devise your organizational architectures.

15. Conclusion
and business ^
“…a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans.”