Alternative Modes of Governance

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* Book: LAWLESSNESS AND ECONOMICS: ALTERNATIVE MODES OF GOVERNANCE, by Avinash K. Dixit. Princeton: Princeton University Press, 2004. 176pp.


Review

Wesley Milner:

"Dixit focuses almost exclusively on non-governmental alternatives since it is assumed that law promulgated by government is virtually absent or at best ineffective.

Though the book is relatively concise, each chapter is quite thorough in its approach. First, the author surveys a breadth of literature that is methodologically and substantively diverse. Here Dixit is able to weave together case studies, econometric research and theoretical modeling. Drawing from this, he ultimately develops a number of new models and then evaluates them in terms of what has been gained, where the approach is lacking, and what specific research questions are still left for future study.

The second chapter describes the shortcomings of formal legal institutions and the myriad reasons that private accommodations arise. These include long delays in obtaining and enforcing [*962] judgments, underestimation of damages, high costs, and inadequate breadth of judges to handle the complexity of cases across multiple industries. Another primary reason for private ordering pertains to information—i.e., whether the information is private, observable or verifiable. In the end, Dixit argues that private methods are better at utilizing information, although they usually cannot be adjudicated in a domestic court at a reasonable cost. His modeling proposals include self-enforcing long-term relationships and arbitration by specialized third parties.

Chapter Three turns to relation-based contract enforcement and compares it to a more rule-based system of laws and of auditing and monitoring mechanisms. Drawing from Dugatkin (1999), Dixit provides four categories of cooperation: 1) kin and family selection; 2) direct reciprocity; selfish teamwork; and 4) group altruism. In referring to the traditional prisoners’ dilemma, we see that successful approaches work by providing future costs to the player of choosing an action that results in an immediate personal gain. Much of the literature here deals with surveys of firms, primarily in Eastern Europe. The modeling focuses on sustaining cooperative outcomes in groups where traders have scant direct reciprocity. He finds that for groups that grow too large for self-governance, smaller entities will develop that can sustain legitimate and honest dealings. Refering to the lamentation of civil society’s demise, Dixit observes that there is still a vital role for civic institutions—e.g., business and social associations like Lions, churches, and charities. Having said that, he does acknowledge that as economies grow and become more global, self-governance must finally succumb to more formal regimes.

In the next chapter, the author deals with profit-motivated contract enforcement. Distilling down the problems of large groups dealing with prisoners’ dilemmas, he states that the most pressing issue is collecting and disseminating information about defection and creating a viable mechanism of punishments to deter cheating both contemporarily and in the future. Trade associations are able to provide this service. Here there are typically three types: trading relationships with pairs of its own members, trades between a member on one side and a non-member on the other, and Better Business Bureaus who provide info on members to the general public. On the enforcement side, Dixit draws similarities and difference with the provision of information. With his modeling he finds that players are often trapped in a less than desirable equilibrium with an enforcer. We see that in his example of organized crime the intermediary demands a higher commission when providing enforcement rather than just information. The model not surprisingly also indicates that violence is more likely with enforcement in the presence of competitive rivals.

The final substantive chapter (Five) addresses the important issue of private protection of property rights. The need for securing property rights has been illustrated in the emergence of Western European economies as well as with less developed and transitioning economic systems. Threats to property rights can originate from individuals, and even from the state itself or representatives of [*963] the state. Property rights in this context consist of decisions about how to use one’s rights, ownership of the income produced by them, and selling either control or income rights or both. Because of collective action problems, property rights are required to reduce or eliminate losses to efficiency. In this highly politicized game, the winners are normally decided by the ones better organized—usually the minorities with more concentrated benefits or costs. After discussing a number of cases (mineral rights, federal land policies in the West, fisheries and oil exploration), Dixit argues, not surprisingly, that in the absence of government protection of rights, individuals and groups will move in with private protection. Finally, he proposes models (with some success) of different scenarios including production and protection under anarchy or chaos, for-profit private protection, and state government as predator rather than protector of property rights.

In a succinct passage in the concluding chapter, LAWLESSNESS AND ECONOMICS exposes the very important policy relevance of this field. At the core, the issues surrounding governance are central to addressing the challenges of growth in the developing world and transition in former socialist states. By adeptly integrating empirical and theoretical research on governance (especially in relations to rights and contracts), Dixit indeed does push the field a substantial distance. For many in associated disciplines, such as economics, political science, sociology, anthropology and law, this work is a rather comprehensive foray into a growing area of study. For those with little background in economics or formal modeling, however, the latter portions of the chapters (especially the very detailed and substantial mathematical appendices) might prove difficult to digest." (http://www.bsos.umd.edu/gvpt/lpbr/subpages/reviews/dixit1204.htm)