The Tragedy of the Anticommons: Property in the Transition from Marx to Markets

Michael A. Heller

Commons: multiple owners have the privilege to use a given

resource, and no one has the right to exclude another. Too many owners with privileges of use, leads to overuse – a tragedy of the commons Example: depleted fisheries and overgrazed fields

Anticommons: multiple owners poses the right to exclude others from a scarce resource, and no one has an effective privilege of use.

Too many owners with the rights of exclusion leads to underuse - a tragedy of the anticommons.

Anticommons property may appear whenever governments define new property rights in both post-socialist and developed market economies.

Once an anticommons emerges, collecting rights into usable private property bundles can be brutal and slow.

Paradigm: Moscow empty storefronts

Key Elements of Socialist Law

• no private property the state own all land • use rights have state organizations • conflicts among users of state property were

resolved through a dispute-settlement mechanism

1. Hierarchy of Property • market legal systems : focus on the scope of individual rights (real and

personal, or tangible and intangible) • socialist legal system: focused on identity of the owner

Hierearchy: state socialist property cooperative property personal property (family houses, cars, furniture, or clothes)

• Transition: equalize private ownership with a state

The absence of real estate as a legal category suggests three elements that distinguished socialist property laws from market legal systems:

2. Objects of Socialist Property • Productive assets belonged to "the people as a whole," so no

physical and legal boundaries of private property • often no record of the line dividing land between two buildings

3. Ownership of Socialist Property • complex hierarchy of divided and coordinated rights in the

objects (trust)

Socialist vs. market property laws

Protection and Performance • Hypothesis: the more protection property received

under socialist law, the less successful its performance has been in a new market economy Residential real estate - less protection better performance commercial real estate – more protection worse

performance

Case Study of Empty Stores in Moscow

• Stores in socialist regimes were bare because of an economic policy that disfavored production of consumer goods

• After privatization many storefronts in Moscow remained empty

• On the streets thousands of metal kiosks, filled with goods The presence of kiosks can be seen

as a visual indicator for measuring a transition country's progress from anticommons to private property

• title to most stores is unclear • stores are occupied by state enterprises • practical business reasons

– capital to stock a small kiosk low – Low cost of inventory – merchants may be better able to respond to market

demands by changing kiosk location – less vulnerable to regulatory holdups – Moscow's hesitation to privatize its commercial space,

bureaucracy, crime, and corrupt government officials as barriers to retail expansion

– store rents are high (space is scarce)

Why have Moscow merchants not completed the move from kiosks into stores?

Legal Context • ownership of real estate was decentralized from federal to regional

(oblast) and local government (led to monopolistic control over property)

• four categories of rights-holders emerged during the transition (they could block each other from using a store without permission) 1. Owners: – local government council (Duma)is the formal owner – empowered to sell, lease, or mortgage assets – federal government retains some control (rights to specify a sale or lease

process and to define the range of possible prices) 2. Users: – occupants of commercial property, often workers of the state enterprise

assigned to the space

Legal Context 3. Balance-Sheet Holders – archaic Soviet form of property ownership

analog to trust in the West – state organization or individual with the

rights to use property formally owned "by the people”

4. Regulators – Six agencies must approve all leases,

including the city architect, the Committee on Preservation of Architecture and Historical Monuments, and the land-reform comittee

Emergence of the Anticommons

• During the process of privatization, existing socialist and informal use rights stayed together with the new set of market ownership right – multiple owners must

agree among themselves to exercise their "ownership" stick in the property bundle

– any use of the storefront requires the agreement of multiple parties

Overcoming the Anticommons

• unifying fragmented property rights into a usable bundle through: – markets (nagatotion with all the holders)

• Threats are: transaction costs of bundling exceed the gains from conversion, or owners engages in strategic behavior

• The market route to bundling may be subdivided into two types: 1. Legal, selling right through formal,enfocable contracts 2. Illegal market transactions (informal or corrupt channels)

– Governments (redefining and reallocating property rights)

Street Kiosks: Appearance of the Kiosks • During the early years of transition, kiosk

merchants were also faced with an anticommons: numerous parties, holding both formal and informal rights, could block street access

• by the early 1990‘s , merchants could acquire informal rights on the streets to set up commercial outlets (corruption contracts with local government rights-holders and protection contracts with the mafia)

• By routinizing the corruption process, entrepreneurs quickly reduced the transaction costs

• Kiosks provided an early solution to the problem of establishing commercial outlets in a country desperately short of retail services

• success of kiosks have reduced pressure to overcome the anticommonsin stores

• kiosk system does not generate the levels of economic activity like well-functioning retail sector

• People are in the informal economy because the formal legal system drives them there

• one path to overcoming a tragedy of the anticommons may be by tolerating informal corruption contracts

• quasi-private property rights operate at a lower level of economic efficiency

Disappearance of the Kiosks

• Moscow city government has tried to eliminate kiosks from the streets

• As storefronts become more available, rents drop, and merchants decide to replace kiosks with storefronts

• Alternatively, the decline in the number of kiosks is not linked to resolution of the storefront anticommons, but the city enforcement existing laws against kiosks.

• That worsens the local retail economy and creates even higher repressed demand for retail space

• ideally, kiosks should die out of their own, as owners move into more stable premises

Individual Apartments

• In socialism local government or enterprise assigned an apartment to a family, the family owned a lifelong inheritable tenancy

• no one could sell or lease the unit at market rates • residential privatization laws offered to the sitting tenant,

either for free or for a very low price • privatization gave tenants control of a property rights bundle • most people were given apartments with negligible or

negative net present economic value because of poor maintenance, high energy costs, or bad location

• By contrast, a small number of well-connected aparatchiks (high officials of the old regime) used their previous positions to receive high-value, well-maintained apartments in city center

• The apartment example suggests that avoiding anticommons tragedy and achieving distributive goals is possible by transferring bundle rights

• New housing markets have been remarkably successful across the former socialist world

Communal Apartments komunalkas • komunalkas were mostly large prerevolutionary apartments, well-situated

in downtown apartment buildings • At some points in Soviet history, several dozen people might have shared

one komunalka • Each family, comprising up to three generations, assigned one room • Kitchen and bathroom facilities were shared • During privatization, tenants received some ownership rights in their room

and, indirectly, the right to block others from using the whole apartment as a single-family or office space

• Each owner could keep any other owner from renting out the entire apartment

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• This represent spatial anticommons, distinct from the legal anticommons

• owner may have a relatively standard bundle of rights, but too little space for ordinary use

• If all the owners were to sell their rooms and leave the unit, the whole apartment could be marketed as a single piece of real estate

• well-situated komunalkas could be converted to private property by exchanging the owners' rights to rooms for complete apartments on the city outskirt

value of the entire apartment 500‘

tenants 4

value of each of four communal rooms 25‘

anticommons value 25‘ x 4 = 100‘

Gain from converting to private property +400‘

value of apartment in outskirt 75’

value for substitute apartments 4 x 75’ = 300’

tenants gain 75’ – 25’ = 50’

value of the apartment 500’

relocation costs - 300‘

transaction costs -50‘

Profit for Property Bundler 150‘

• Some property bundlers have achieved conversion quickly by intimidating or murdering tenants

• Tenants are mostly elder people • consequence of creating anticommons property the

creation of a group of komunalka tenants who are particularly vulnerable to predatory

Transaction Costs and Strategic Behaviors in Bundling

What allowed anticommons property in well-situated komunalkas to be overcome while ground-floor stores in the same buildings often remain empty?

1. Type of Anticommons Owner: 1. Public :

•Storefront owners have more power and protection and may not be as easily intimidated •Instead, public and corporate owners must be bribed •Problem “whom to bribe?” •public owners may not behave in profit-maximizing ways

2. Private: • The transaction costs of negotiating with private

owners may be lower • Komunalka owners are private individuals, often

elderly not well-positioned to resist market pressures

• Komunalka owners traceable • No holdouts among komunalka owners (sharing

the economic gains of conversion, or engaging in intimidation)

Type of Anticommons Owner

2. Number of Anticommons Owners/Homogeneity of Interests – Fewer owners, with more homogeneous interests,

in komunalkas – larger number of corporate and state owners,

with more heterogeneous interests ranging from current income to long-term bureaucratic survival

− Bribes to one bureaucratic owner may not bind other owners even within the same organization, at least until such bribery channels are routinized

3. Boundary of the Anticommons – Each komunalka could be easily bounded as private

property – store boundaries are not as transparent

• workers' cooperative may claim that the single bakery that they occupy constitutes the object of property subject to their private ownership

• state bread making enterprise, may claim that the entire chain of bakery outlets is a single asset

• local administration may claim that all bakeries belong to it

4. Spatial or Legal Anticommons – Overcoming a spatial anticommons

(privatized komunalkas) is less difficult – In a storefront legal rights were handed

out to too many owners

5. Starting Point in Transition – Komunalka tenants received relatively

standard legal bundles – stores often began empty, as part of

the holdings of bankrupt state and local organizations

Contingent Values in Anticommons Property

• Different types of uncertainty about the future give rise to speculative value in an object – premium for the possibility that oil or diamonds may be

discovered underneath – discount for the possibility that government may change

zoning or tax laws • Two of these speculative values affect the value of a

right in an object but do not affect its private property value (option value and the contingent value)

• option value: expected gain from converting anticommons property to private property (economic value)

• contingent value: expected gain from rent-seeking that privileges one owner at the expense of the others (political value) – In komunalka contingent value set to zero, in stable environment

concentrated to option value − Kiosk owners also place no contingent value on holding streets empty, because redefining property rights in a way that would legalize the clusters of kiosks is unlikely. They focus on maximizing current economic value − Storefront owners

•if expect stability, may convert their rights into private property when they can overcome transaction costs and holdout problems •If expected instability owners may prefer to keep their stores empty and use the rights in political battles rather than in economic markets

The outcomes for owners of komunalka and storefront anticommons property are

likely to differ

Marke value in private property form

Anticommons value

Anticommons value

Option value

Contingent value

Transaction costs

Transaction costs

Komunalka is converted

Storefront is not converted

Conclusion

• Once anticommons property is created, markets or governments may have difficulty in assembling rights into usable bundles – Deviant strategic behaviors, ordinary transaction costs, and

contingent values may block bundling • individual apartments show governments have avoided creating

anticommons property • Kiosks show the benefits and costs of taking the path from

anticommons to illegal quasi private property. • komunalkas, property bundlers were able to convert

anticommons to private property legally • storefronts seem to represent a paradigmatic case of the failure

of bundling and appearance of the tragedy of the anticommons

•Governments are tempted to create anticommons property, to respond to pressure by existing stakeholders, or to address short-term distributional concerns •Downsizing of government functions created intense competition among threatened bureaucrats to hold onto plausible property rights •existing stakeholders demanded protection and inclusion

Part II – The Tragedy of the Anticommons • Private property vs. anticommons • For classical theorists, property is a thing and

property theory defines the relationship between a person and a thing.

• During 20th century, property theorists defined property as a bundle of rights.

• The difference between private property and other property types depends on three elements

Characteristics of Private Property

1) The possibility of full ownership: PP requires that one owner have full decision making authority over an object

2) Rights and bundles: all of the infinite number of potential relations people may have with each other over any particular object

3) Restrictions on extreme decompostion: restraints on breaking up property bundles too much

Property rights that make up the bundle of rights

• The right to exclusive possession • The right to personal use and enjoyment • The right to manage use by others • The right to the income from use by others • The right to the capital value • The right to security • The power of transmissibility by gift, devise, or descent • The lack of any term on these rights • The duty to refrain from using the object in ways that harm others • The liability to execution for repayment of debts • Residual rights on the reersion of lapsed ownership rights held by

others

Privileges of Inclusion / Rights of Exclusion • Multiple privileges of

inclusion are non-exclusive. Owners may use an object without permission from or coordination with other such owners.

• Multiple owners of rights of exlusion in an object each have a veto on others’ use. Such owners may prevent others from using the object.

Anticommons Property • A property regime in which multiple owners

hold formal or informal rights of exclusion in a scarce resource

• In this regime, it is rights, rather than bundles, that are the locus of property endowments

• Multiple owners hold a core rights in the same object

• There is no hierarchy among these owners or clear rules for conflict resolution

Anticommons Property

• Ownership of AP includes the ability by each owner to exclude other owners from exercising a core bundle of rights in an object

• AP may be created in objects for which use is perferable to non-use

• A legal anticommons emerges when multiple owners hold less than a core bundle of rights in an object; a spatial anticommons occurs when multiple owners’ core bundles are in an object too small for efficient use

Anticommons Property • Keeping the objects in anticommons ownership

means that the object may not be alienable, may not be available for productive use, and has no clear hierarchy of decision-making authority among anticommons owners

• Non-private property may be analyzed as anticommons property if rights of exclusion dominate or as commons property if privileged of inclusion dominate

Tragedy of the Anticommons as a Prisoner´s Dilemma

In this situation, the domimant strategy for both players is to exclude. This results in stores reamining empty.

Storeowner B

Cooperate Exclude

Storeowner A Cooperate 5,5 2,6

Exclude 6,2 3,3

Rewarding Individual Cooperation

For example, if government increases the security of property rights generally, the net pay-off from cooperating could increase.

Storeowner B

Cooperate Exclude

Storeowner A Cooperate 7,7 4,6

Exclude 6,4 3,3

Rewarding Joint Cooperation

Improvements in enforcement of long-term leases ot the development of the property insurance markets could improve the payoff by 2, but only if both cooperate

Storeowner B

Cooperate Exclude

Storeowner A Cooperate 7,7 2,6

Exclude 6,2 3,3

Punishing Individual Exclusion

By devaluing each player’s contingent claims, so they do not attempt to exercise them in political markets

Storeowner B

Cooperate Exclude

Storeowner A Cooperate 5,5 2,4

Exclude 4,2 1,1

Punishing Joint Exclusion

By imposing a vacancy tax on each empty storefront, that would translate into a negative payoff of -2 for each storeowner

Storeowner B

Cooperate Exclude

Storeowner A Cooperate 5,5 2,6

Exclude 6,2 1,1

• Markets may operate to bundle anticommons property by generating institutions that reduce transaction costs or by encouraging cooperative norms to evolve over time

• Relatively modest changes in the property rights regime may change the dominant strategy

• Initial incentives may be sucht that no cooperative outcime will emerge and governments may need to intervene directly to end the game

Applications and Implications

• Anticommons property may emerge in develope markets and transition economies wherever new property rights are being defined and pressures to ratify multiple rights of exclusion are great.

• Examples: - Rapid enterprise privatization and slow

restructuring - The Quaker Oats Big Inch Land Giveaway - Post earthquake reconstruction of Kobe, Japan - Fractionation of Native American allotted lands

Conclusion

• AP is prone to the tragedy of underuse • Once it appears, neither markets nor subsequent

regulation will reliably convert it into useful private property

• Governments must take care to avoid creating AP • The content of property bundles and not just the

clarity of peoperty rights matter

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