Abstract
Two empirical studies on well-known externalities seem to confirm Coase’s (J Law Econ 17(2):357–376, 1960) insight, according to which transactions on property rights will occur if their gains are greater than their costs. However, the trespassing cattle case (Ellickson in, Stanford Law Rev 38(3): 623–687, 1986) shows that neighbours do not refer to legal entitlements and settle their disputes without monetary transaction, which may be due, according to us, to other impediments to bargaining than transaction costs: some social norms prevent the market from developing. Such a market exists in the pollinating bees case (Cheung in, J Law Econ 16(1): 11–33, 1973), but we show that, if transactions over ‘externalities’ are facilitated, other externalities, which remain at its borders, are also handled with social norms. Both studies contribute to an institutional description of the functioning of a market over rights or of its impediments.
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Notes
See Medema and Zerbe (2000) for a review.
In Coase’s words (1960, 15–16), ‘once the costs of carrying out market transactions are taken into account it is clear that such a rearrangement of rights will only be undertaken when the increase in the value of production consequent upon the rearrangement is greater than the costs which would be involved in bringing it about.’ Stigler (1989, 631) extracted the core of his argument: ‘Ronald Coase taught us, what of course we should already have known, that when it is to the benefit of people to reach an agreement, they will seek to reach it.’
Cheung (1973, 33) concludes his study with a very Coasean flavour: ‘My main criticism… concerns their [the Pigovian tradition] approach to economic inquiry in failing to investigate the real-world situation and in arriving at policy implications out of sheer imagination. As a result, their work contributes little to our understanding of the actual economic system.’
On cattle and bees, see also Vogel (1987) and Johnson (1973) that we will use in our development. Hanley and Sumner (1995) study the resolution of externalities due to red deer in Scotland and their conclusions are close to Ellickson’s. Other empirical studies on the ‘Coase theorem’ concern pre-trial settlements (Glanter 1983), transactions on nuisance after trials (Farnsworth 1999), but the majority concern a ‘theorem’ extended to the law (i.e. the proposition of the absence of effects of a change in the law): share tenancy arrangements (Cheung 1969), rules governing divorce (Peters 1986), the effect of a payment of bonuses to unemployed workers when they obtain a job or to employers when they hire unemployed people (Donohue 1989) and transfers of baseball players (Hylan, Lage and Treglia 1996). For a review of the experimental and empirical studies of the ‘Coase theorem’, see Medema (1997a) and Medema and Zerbe (2000).
Throughout this article, we define a social norm as ‘a rule governing an individual’s behavior that third parties other than state agents diffusely enforce by means of social sanctions’ (Ellickson 2001, 3; see also ch 7).
The phrase ‘in the shadow of the law’ is due to Mnookin and Kornhauser (1979).
The actual incidents caused by strayed livestock are diverse: trespassing animals may eat the grass or the hay stocks of the victim’s cattle, damage fences, ornamental trees or vegetable garden; cows can be impregnated by a bull, etc. (Ellickson 1986, 658–659). In his book, Ellickson (1991) extends the analysis of the behaviour of Shasta County landowners to the joint erection and maintenance of fences and the incidents resulting from collisions of cattle and vehicles; and he infers a theory of norms. The issue of fences is also interesting regarding the applicability of the ‘Coase theorem’, since they provide a positive externality to neighbours. Ellickson infers from his interviews that landowners tend to ignore legal rules regarding the sharing of fence costs: they do not know the legal rules applicable to the reimbursement of a share of the fence costs from a neighbour who benefits from it (and they do not refer to the law of trespass, which could be relevant). Instead they apply a norm of proportionally sharing the costs of erection and maintenance of fences, according to the cattle raised by each neighbour. This norm ‘calls for adjoining landowners to share fencing costs in rough proportion to the average density of livestock present on the respective sides of the boundary line’ (71). Because the computation of density proportions can be complex, this rule comes to focal-point allocations ‘such as fifty-fifty, all-or-nothing, you-materials/me-labor’ (72). These agreements could be interpreted as ‘Coase theorem’-like mechanisms. However, there are no formal claims or official contracts (69) and cash payments are prohibited between neighbours (78–79); this is why Ellickson interprets these agreements as social norms by opposition to contracts (246). If these agreements regarding fences were interpreted as bilateral exchanges between price makers, we could nevertheless interpret the rule of proportionality and the existence of focal points as diminishing the indeterminacy of the result, thus leading more rapidly to an agreement between the parties (188–189).
Different modes of ranching exist: traditionalist ranchers let their cattle roam in unfenced mountain areas during the summer, whereas modernists keep their cattle behind fences in irrigated pastures. Many of the recent settlers are retirees or younger migrants: these ranchette owners own few animals only, behind fences (Ellickson 1986, 636–639).
Ellickson seems to infer that the quality of fences does not change because the decisions about the shares of the costs of fencing do not depend on the formal law (1991, ch 4; see fn 9). To assert that the allocation of resources is not affected, he also relies on aerial photographs of Caton’s Folly border before and after Caton’s Folly passed closed-range, interpreted by a geobotanist who ‘could detect no evidence of changes in cattle operations either inside or outside Caton’s Folly between 1973 and 1980’ (Ellickson 1991, 110, fn 9; see also 1986, 656, fn 82). This is, however, not self-evident. On the one hand, Ellickson himself explains that, in response to closed-range ordinances, traditionalist ranchers remove their cattle from unfenced range (1986, 643; 1991, 110–113), even if ‘the consequences were too invisible to be corroborated from the air’ (1991, 110, fn 9). On the other hand, analysing the effects of the changes in trespass law in the different counties of California, during the second half of the nineteenth century, Vogel (1987) showed with a linear regression analysis that the assignment of rights toward the farmer tended to increase the farm output. That being said, this study does not examine the same period as Ellickson’s, and that, as Vogel (1987, 180) recognizes, ‘these adjustments took place as a feedback process. Not only did the law effect [sic] the way in which economic production was transformed, but the economic conversions also caused changes in the law. Farming and mercantile interests lobbied the legislature to enact rules that were more favorable to farmers.’ For detailed studies on the reasons and consequences of the move from open-range to closed-range at the end of the nineteenth century, in Georgia and Kansas, see Kantor and Kousser (1993) and Sanchez and Nugent (2000), respectively; their arguments actually rest on a subsequent reallocation of resources.
It would be more rigorous to state that the cost of learning the law exceeds its expected gain; this is implicit in Ellickson’s analysis of the Shasta County case.
The landowners he chose to interview were ‘disproportionately active’ in the political debates surrounding the delimitations of these areas (Ellickson 1986, 669, fn 123) and in Oak Run, they had just escaped a closed-range ordinance: ‘In the summer of 1982, probably no populace in the United States was more alert to the legal distinction between open- and closed-range than the inhabitants of Oak Run’ (669).
Of course, in the open-range parts of the county, farmers cannot have recourse to the formal law since they do not legally own the right to be free from trespass. This kind of informal enforcement in an homogeneous group can be compared to the informal enforcement of contracts by the Chinese middlemen group observed by Landa (1981), in a context of not well developed law of contracts. For the significance of her observations regarding the ‘Coase theorem’, see Medema (1997a, 136–138).
‘The county officials typically contact the owner of the animal, who then arranges for its removal’ (Ellickson 1986, 679). Sometimes, they threat to impound the animal, to prosecute the cattleman (in closed-range), or to initiate a legal procedure in order to close an open-range area (680).
The victims who invoke their legal rights are thus another kind of deviants.
An unusually large loss may lead to the deviant behaviour of a monetary claim (against the other’s insurance company), but it seems to be the case of ranchette owners only (Ellickson 1986, 682–683). On the contrary, ranchers never claim for monetary relief, even when the loss is not small (e.g. $300–500 (676) to be compared to their low monetary income, see fn 30).
This is the rent seeking behaviour; for a review and a discussion of the criticisms of the ‘Coase theorem’ along these lines, see Medema (1991, 1997b). The fact that ranchers fight against a closed-range ordinance may seem difficult to explain since all landowners in Shasta County already act as if ranchers were liable. Ellickson explains that they fight not only because of what they perceive as an increased liability facing motorists (1991, 104) (which is, again, an erroneous belief: in fact, a negligence rule applies in both cases (88)), but above all because they interpret a closed-range ordinance as recognizing the transformation of a rural and ranching area into an urbanized one, thus diminishing their social status. For ranchers, ‘a closure campaign is in significant part a struggle over official recognition of who has what place in the sun’ (117); they are determined ‘to preserve an open-range legal regime that to them signified that the cattleman was still king of the county’ (234).
Ellickson (1991) finds in Shasta County another example of the fact that disputants will rely on informal order when they expect that their relationship will continue and when information on others’ behavior easily circulate and sanctions may be effective. On the contrary, they will all the more resort to formal law that they are socially distant, that the stake is higher, and that this recourse provides for an externalization of the cost on a third party, such as an insurance company (this is typically the case of a collision between a vehicle and a livestock).
‘A group is close-knit when informal power is broadly distributed among group members and the information pertinent to informal control circulates easily among them’ (Ellickson 1991, 177–178, his emphasis).
Of course, Ellickson (1991, 173, fn 20) refers to Coase as a landmark ‘in the intellectual evolution of this particular calculus.’ He then provides some empirical examples supporting this hypothesis of wealth-maximizing norms: Shasta County landowners, but also, among others, whalers (see Ellickson 1989a) and businessmen (see Macauley 1963). His theory of social norms is criticised from different points of view: its non falsifiability (Cooney 1993), the problem of the internalization of norms (Cooter 1993), the focus on rationality and self-interest (Merges 1993), the role of other factors than close-knitedness to enforce social norms (Baumgartner 1993), the difficulty to generalize when groups are not close-knit or when the stakes are higher (Libecap 1993), the understatement of political conflicts and the limits of the close-knit group (Yngvesson 1993), the formalist definition of law (Brigham 1993) and the possibility of inefficient norms in close-knit groups (Posner 1996).
It has to be noted that Ellickson (1986, 655) recognises a selection bias in the Shasta County case: ‘Cooperative people were undoubtedly somewhat overrepresented in the sample.’ Moreover, the question of the boundaries of the group and of the prevalence of the norms brought to light is raised: ‘In general, the traditionalists who let their animals loose in the mountains during the summer are less scrupulous than the modernists are in honoring the norms of neighborliness’ (677).
This seems to be what Ellickson does when questioning Donohue’s results about the Illinois experiment. Donohue (1989) refuted the ‘Coase theorem’: some mutually advantageous bargains actually do not take place although transaction costs are low. Ellickson (1989b, 625) answers that there is no negotiation because transaction costs are high (implicitly higher than the stakes): ‘That many bonuses went uncollected may indicate not irrationality and inefficiency but that workers and employers responded intelligently to the reality of transaction costs.’ Of course, transaction costs are not measured here, either by Donohue or by Ellickson.
See also Hovenkamp (1990, 806).
This answers to the possible argument according to which incomplete information is by itself a transaction cost (following Dahlman (1979)’s definition of transaction costs for example): arguing that neighbours do not engage in transactions because they do not know the law misses the point that they do not want to engage in transactions and therefore do not need to know the law.
Ellickson interprets the norm as transaction costs or justifies it by these costs: this attempt to rationalise the norm does nothing but clarify it or clarify its economical effects (Merges 1993, 304). In the same line, Hovenkamp (1990) explains that, in Ellickson’s case study, the ‘Coase theorem’ does not apply because the landowner does not maximise profits, but its utility, which takes into account the ‘quality of his life in the community’ (806). According to us, this is another mean of translating the effect of the norm. Moreover, this interpretation has the inconvenient raised by Medema (1997a, 138) about that of Ellickson: it rationalises behaviours ex post rather than explaining them.
See Hoffman and Spitzer (1985).
Coase (1996, 109) answered that he was concerned by business firms that ‘will normally be attempting to maximise their profits and the etiquette governing the relations of neighbours would have little relevance for their behaviour.’ First, as Ellickson shows (and Macauley 1963), this etiquette, however, plays a part in the settling of conflicts between producers. Second, Coase also imagines monetary resolution of disputes between neighbours-consumers (e.g. the smoke nuisance between adjoining houses, see Coase 1960, 11).
Merges explains that ‘while Ellickson sees norms as primarily adapted to efficiently allocate valuable commodities, a good number of contemporary sociologists would no doubt reply that he has it exactly backward: norms dictate which commodities have economic value in the first place’ (1993, 308, his emphasis).
Cheung himself told this story. He was at a conference at the University of British Columbia with Coase: ‘It was on the trip back from UBC, talking generally about the total ignorance of economists about facts, that we talked about the case of the bees. I thought he was going to do it. So I didn’t pay much attention. Then someone mentioned he had a relative who had an orchard and rented a beehive. So I called Coase and he said there was already someone working on that. Then Coase received the paper [(Johnson 1973)], and Coase wasn’t completely satisfied with it and invited me to work on it. I was host of a party, and Coase called me and read the whole paper on the phone. So I took on the bee project and knew the kind of job he wanted because of his persistent emphasis on our having to know the facts’ (in Kitch 1983, 224). There is a third criticism of Meade’s analysis in this JLE volume, by Gould (1973), but this one is theoretical.
Johnson (1973) examines the institutional setting of the beekeeping industry and concludes that ‘no theoretical or institutional reasons could be found which justified the a priori claim that mutually beneficial contracts could not be made between beekeepers and apple growers because of nonappropriability or difficulty of keeping tabs’ (43). Then he describes the real-world setting of the market, and infers from the mobility of the factors of production and from the existence of brokers and middlemen (44) that ‘brief reference to the real world suggests that the private market contracts among bee owners and growers are made in a competitive environment and they function smoothly’ (48). It has to be noted that, for the most part, Johnson examines the beekeeping-pollinating industry and not the beekeeping-honey one, the market for pollination services rather than the market for nectar services.
It seems that economists have long been fascinated by bees, from Edgeworth (1907)’s statistical study on bee behaviour to Landa (1986)’s application of Public Choice analysis to bees’ swarming. But the bee example in economics is not only bucolic: pollination is an essential factor explaining the growth of agricultural productivity in the United States after World War II (Olmstead and Wooten 1987).
‘Long’ means here since World War I: before, ‘small farms had enough flowering plants and trees to attract wild insects’ (Cheung 1973, 15).
Today, you need look no further than Google.
In his model, he has explicitly assumes ‘no costs for collating bids and asks or for forming rental contracts among all actual and potential participants’ (Cheung 1973, 21–22). It is also worth noting that this cost of transacting is assumed to equal the price of a lease of a hive to another beekeeper so that the lessee rent the hive to a farmer: this means that Cheung also assumes that, in this market, price of the service equals its cost (28).
At the same time, ironically enough, there was a federal program treating pollination as an externality: the honey program, supporting the price of honey, was created in 1952 to enhance pollination assumed to be underprovided by the market (because of a decline in honey consumption and the intensification of demand for legume seeds, the production of which depends on bees). This program had no effect during the period studied by Cheung, but had some effect later (see Cheung 1973, 18; Muth et al. 2003).
‘Pollination contracts usually include stipulations regarding the number and strength of the colonies, the rental fee per hive, the time of delivery and removal of hives, the protection of bees from pesticide sprays, and the strategic placing of hives. Apiary lease contracts differ from pollination contracts in two essential aspects. One is, predictably, that the amount of apiary rent seldom depends on the number of colonies, since the farmer is interested only in obtaining the rent per apiary offered by the highest bidder. Second, the amount of apiary rent is not necessarily fixed. Paid mostly in honey, it may vary according to either the current honey yield or the honey yield of the preceding year’ (Cheung 1973, 29). Cheung (29, fn 38) suggests some explanations for the setting up of these contracts.
This may also limit the possibility for a beekeeper to place his hives near an orchard and not inside, to avoid paying an apiary rent, even if, as mentioned by Siebert (1980, 170), that sometimes happens.
It seems that explicit contracts also exist: ‘Alfalfa seed growers in California… privately but collectively contract for a specific number of colonies to be placed in the fields according to a predetermined time and space schedule’ (Johnson 1973, 45–46, his emphasis). Johnson mentions other means of ‘the market’s attempt at internalization’: for example, farmers schedule their blooms in order that they do not occur in the same time (45). Besides, other positive externalities still remain: for example, owners of gardens do not rent beehives. The externality caused by pollinating bees may also be negative, for example when cross-fertilizing seedless mandarins (the culture of which does not need bees for pollination) with other fruits results in the development of seeds.
Of course, such a definition of efficiency leads to assert that ‘what is is efficient’ (Calabresi 1991, 1216): ‘Yet in a world where each and every individual is asserted to behave consistently with the postulate of constrained maximization, economic inefficiency presents a contradiction in terms. Even outright mistakes are traceable to constraints of some type. The world is efficient, if the model describing it sufficiently specifies the gains and costs to make it so’ (Cheung 1974, 71).
We assume for simplicity, as Cheung implicitly does, that there is no beekeeper producing only honey in the neighbourhood and who would also be harmed by the use of pesticide.
At the time of the enquiry, beekeepers could be reimbursed by the government for any loss due to pesticide (up to 75%), but it was difficult to provide the necessary documents (Cheung 1973, 18–19; Siebert 1980, 169). In California, the use of pesticide was killing an average of 11% of the bees each year (Siebert 1980, 165), which cost beekeepers 4% of their annual income in 1975 (171).
‘The custom of the orchards’ was interpreted by Cheung as a norm, as opposed to an explicit contract, following the farmers’ interpretation, but it could also have been seen as a highly informal contract: ‘The distinction between an oral or an implicit contract and a custom is not always clear… Perhaps the absence of a court of law to enforce what could in fact be a highly informal agreement is the reason why farmers deny the existence of any contract among them governing the employment of hives’ (Cheung 1973, 30, fn 39). Cheung more or less analyses customs and contracts in the same way (see Cheung 1969 and Cheung 1970, 56–57). We follow here Ellickson (1991, 246) who makes a distinction between contracts and norms, the latter being enforced by nongovernmental third parties, and thus classifies ‘the custom of the orchards’ as a norm.
We can find another norm of solidarity between beekeepers in one contract between the Water Department of the City of Seattle and beekeepers. Beekeepers pay a fee to place their hives in a forest maintained by the Department; they do not have the exclusive right and thus there is a risk that the honey yield per hive may diminish, but they cooperate ‘to avoid chaotic hive placement’ (Cheung 1973, 32).
Other factors would have to be included in a theory of externalities, see Medema and Samuels (1997, 96–97).
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Acknowledgments
This paper has benefited from helpful comments and suggestions by Steven Medema and was presented at the ACGEPE conference (May 2010) and the EPEE seminar (February 2010). I also wish to thank Pierre Garrouste and Anne Yvrande-Billon for their comments on an earlier version presented at the ATOM seminar (February 2007) and the EAEPE Conference (November 2006). Alain Marciano and an anonymous referee provided suggestions for improving this paper. Errors and omissions remain mine.
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Bertrand, E. What do cattle and bees tell us about the Coase theorem?. Eur J Law Econ 31, 39–62 (2011). https://doi.org/10.1007/s10657-010-9195-6
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DOI: https://doi.org/10.1007/s10657-010-9195-6