Transcript How do we get round the free-rider problem?

Social Choice
Session 10
Carmen Pasca and John Hey
Collective Action
• Plan for today:
• I plan to discuss the sociological, poltical
science and economic concepts of collective
action.
• We will study the work of different authors.
• We will also study the theory of groups.
• We try to see if one discipline provides all the
answers.
Sociological Approaches
• Tarde (1843-1904), the founder of social psychology, believed
that social reality is made ​through the relationships of
individuals in the society.
• Theories of collective behaviour (G. Tarde and Le Bon G.)
suggest that behaviour is different when individuals act alone or
in spontaneously- formed groups.
• Instead Durkheim believed that social reality requires ways of
acting.
• Paradigm of collective action (Olson):
• Individuals have no incentive to act for organisations that
provide public goods because they benefit anyway.
• Organizations must also provide personal gratification.
Sociology
• Theories of new social movements: from the 1970s,
emphasize the structural transformation of capitalist societies
and the development of new social cleavages (A. Touraine)
and the rise of post-materialist values ​(Inglehart: preference
of individuals for larger causes).
• Alain Touraine thought:
• The society is not conceived as a set of structures and
functions, but as the product of organised social action
groups. The social actor is viewed as an individual subject to
the search for meaning.
• From Machiavelli to Talcott Parsons, social utility outweighs
the individual. Alain Touraine responds and explains that the
idea of moral values ​must order social organisation.
Theory of Collective action and Theory of Groups:
various approaches
• The Logic of Collective Action by Mancur Olson
explains why some groups are able to have a larger
influence on government policy than others.
• The book tries to explains economic policy
decisions.
• You would expect that if a group of people have a
common interest that they will naturally get
together and fight for the common goal. Olson
states, however, that this is generally not the case.
Olsen’s thoughts
• "But it is not in fact true that the idea that groups will act in
their self-interest follows logically from the premise of
rational and self-interested behaviour.
• “It does not follow, because all of the individuals in a group
would gain if they achieved their group objective, that they
would act to achieve that objective, even if they were all
rational and self-interested. Indeed unless the number of
individuals in a group is quite small, or unless there is
coercion or some other special device to make individuals
act in their common interest, rational, self-interested
individuals will not act to achieve their common or group
interests."
Economics
• The Economic Logic of Collective Action.
• Proposed by Gary Becker in his book The Economic Approach to
Human Behavior (1976).
• He is a Member of the Chicago School and won the Nobel Prize in
1992.
• His objectives were to:
• Explain human behaviour in non-economic situations, by examining
behaviour and hence individual choices and not those of groups
(which is the approach used in, for example, Sociology).
• It is not a field of interest specific to economics, but his method,
which is that of explaining behaviour as an individual choice based
on rationality, taking into account the benefits and costs of
individual action.
The Economic Approach
• Economists generally assume that individuals behave
rationally, though what is meant by rationality can vary –
but it is a central unifying concept in economics.
• “People can be selfish, altruistic, loyal, masochistic ... but
they try their best to anticipate the uncertain
consequences of their actions and to maximize their own
welfare as they conceive it" (Becker, 1989) .
• Most, if not all, of the current work of the general theory
of equilibrium (for example: Edgeworth, 1881; Arrow,
1951: Debreu, 1959; Arrow and Hahn, 1971) use the
concept of rational behaviour.
The Economic Approach
• The point is this: although behaviour can in principle take
many forms, it is reasonable to assume that most of the time
it can be described as "rational”.
• The assumption of rational behaviour in pursuit of selfinterest makes the analysis of individual behaviour much
more feasible than less structured statements.
• It should be noted that this assumption is essential in
obtaining several central results in traditional and modern
economic theory. (The concept of Pareto optimality of
competitive equilibrium for example.)
• It is one of the strengths, and perhaps weaknesses, of modern
economics.
Rationality
• The term refers to rational actions designed to maximize its
own goals, whatever they are.
• People may say you are "irrational", but even criminals are
rational – in their own way, given their own preferences.
• The values ​of individuals are not necessarily physical.
A rational individual can be concerned about and value
others, family, children, society, the poor, the oppressed
people in the world, etc.
• People have limited information regarding the implications of
their actions: they often takes actions that seem appropriate
at the time, but thereafter are regretted.
More on “rationality”
• If you act according to what seems best at the time (based on
your limited information), you act rationally (even if you later
regret your choice).
• Rational action does not mean you do not make mistakes.
• Rationality, however, implies that you do not repeat the same
mistake: people learn from their mistakes.
• Individual choices are determined by:
1) Tastes/preferences (subjective assessment of desirability of
things)
2) Opportunities and constraints (environment, technology,
market, prices, income, etc.).
Implications of rationality assumption
• Explanation of observed phenomena (individual and collective
choices) are necessarily based on changes in opportunities for
individuals.
• Tastes and preferences are usually assumed constant.
• Most economic models are based on the assumption of
rationality because it helps explain a number of situations.
Also rationality ‘closes’ models and provides a complete
description of behaviour.
• However there are some economic models which are based
on other assumptions in order to predict and understand
behaviour.
Bounded Rationality
• These other assumptions include “Satisficing“ and "Bounded
Rationality“.
• These assumptions are particularly associated with Herbert
Simon (1957, 1979) who suggested that individuals do
not/cannot maximise some function but rather they are
content with choosing from a range of alternatives that they
consider.
• He argued that each person is characterised by a certain level
of what he considers an adequate choice and does not try to
improve beyond this level.
• Other authors have suggested other variations on the
mechanisms of individual choice under the general
framework of “Bounded Rationality”.
Bounded Rationality
• The proponents of Bounded Rationality
posit that individual decisions are not
made within a framework of overall
maximisation (of utility), but rather as a
series of specific (satisficing) choices, not
fully integrated with each other and
selected from imperfect information and
reflection limited.
Resource Allocation
• The economic approach is essentially private/individual, and
operates through markets and involves decentralized
decisions made by individuals and businesses and using price
as the rationing device.
• The political approach is essentially Public and operates
through the Government or the State, and involves
Centralized decisions made by elected officials / bureaucrats
and using Power as the rationing device.
• Which leads us to the following question:
• What should the role of each be in the allocation of
resources?
The Classical Economic View
• Classical vision of the cooperation problem:
• Adam Smith's invisible hand.
• Adam Smith and the Liberals championed the individualistic
approach.
• The well-being of the state is satisfied by the promotion of
the well-being of individuals.
• Without the need for coercion or of central planning (the
visible hand of the state), individuals, through self-interest,
increase their individual welfare - and collectively - through
the establishment of voluntary markets.
Adam Smith again
• Groups and collective actions that increase the welfare of
individuals will be automatically formed.
• This leads to a justification of laissez-faire.
• Smith assumed that people will realise that cooperation and
exchanges are beneficial to them.
• However, this is not necessarily the case.
• For example, in the Prisoner’s Dilemma individual self-interest
can lead to a solution bad for both instead of to a solution
that is better for both. Indeed the Prisoner’s Dilemma is an
obvious refutation of Smith’s ideas.
Political Science
• Michael Taylor (1980) The Evolution of Cooperation
• Perceives the state as an institution able to solve the problem
of cooperation.
• Seeks to enforce trade on the market (that is property rights).
• Institution needed to yield the optimal collective choice.
Two main situations:
Small Groups / Exchanges / repeat Perfect information
cooperation easier and more likely
• Large Groups / Trade Non-repeated / Imperfect information
• Cooperation in public goods is difficult:
Example: infrastructure, defence.
• He argues for the necessity of the State.
Theory of collective action
• Mancur Olson (1965) The Logic of Collective Action
• According to Olson, government intervention is not
always necessary.
• In some cases, for certain types of goods and
services, groups can solve the problem of "freerider“ in various ways without state intervention:
• Theory of "by-products" (selective incentives).
• Collective actions have characteristics similar to
those of public goods.
Back to Public Goods
• Non-rivalry: once produced, all individuals can benefit from
the public good (collective action) without reducing the
benefits afforded to other individuals.
• Non-exclusivity: once produced, it is difficult to exclude an
individual who has not contributed to the financing of public
good (in the organization).
• Mancur Olson continued....
• Rational individuals often have no incentive to participate in
collective action but rather to let others act for them.
• Example: Politics; public goods; tax evasion
• Example: Business / Organizations; teamwork; unions.
A Model
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C: The cost of participating in a group.
Vi: Gross profit groups from participation of individual i.
Ai: Net income for the individual to participate i.
Ai = Vi - C
If Σ(Vi - Ci) > 0, where the sum is over all i from1 to n.
→ advantageous to form a group
• If Ai < 0 for all i = 1,., n
→ The group is latent
• If Ai > 0 for all i = 1,..., n
→ The group is preferred if an individual has an interest in
obtaining the public good for the group.
Types of Group
• An intermediate group lies between these two extremes.
• Privileged group.
• Feature: exploitation of the large by the small.
Example: NATO
The United States and Germany bear a greater financial
burden (as a proportion of GDP) than other countries.
• Latent group.
• A latent group is difficult to organize because the individual
benefits are too low relative to costs.
• Example: Consumers of milk vs. milk quotas (ex milk
producers).
Solutions for latent groups
• Solutions for organization of latent groups:
• Incentives "selective“ (by-product)
• When the group can not exclude free riders of benefits
related to public welfare, additional private benefits can be
added (or coercion).
Example: unions, political parties.
• Extra-rational behavior of individuals.
• Even if the personal contribution of an individual will not
contribute significantly to further the common cause,
individual perceptions and personal beliefs may drive people
to participate (example: pleasure associated with
participation; voting in an election).
Political Entrepreneurs
• Some individuals believe that their participation in a
collective cause can help career advancement. The
individual derives a private benefit, therefore, most
important of his participation as the sole collective
good product.
• The theory of "by-product" explains the organization
of latent groups through the provision of private
benefits (selective) to individuals to encourage their
participation in the group.
Conclusions
• Economists, Sociologists and Political Scientists all
have something to contribute.
• Economists believe that in certain contexts the
rational pursuit of self-interest can spur collective
action, or possibly boundedly rational behaviour.
• Sociologists introduce social elements.
• Political Scientists introduce further elements
yielding utility to the decision-makers.
• No one discipline provides all the answers.