Abstract
This article discusses the insights that Elinor Ostrom’s work on common-pool resources and governing the commons can provide for the literature on fiscal commons. Institutional approaches to public finance often employ the metaphor of ‘budgetary commons’. Although intuitively appealing, the notion of budgetary commons faces the danger of becoming a catch-all term that is simply taken as a starting point for an inquiry, without scrutinising the fit between the metaphor and the actual setting. In addressing this shortcoming, the literature on budgetary commons can learn from Elinor Ostrom and the analytical approaches she has advocated in her research on natural commons. This article brings out insights from Ostrom’s work that would be particularly useful for institutional analysis of budgeting. It shows that institutional approaches to public finance can draw on Ostrom’s work with regard to the general approach for examining institutional configurations and their evolution over time, the analytical structures she uses for conceptualising the problems occurring on the commons, the desire to understand institutional complexity in real-life settings, and her scepticism of over-simplified models that are often used for describing and understanding the problems of common-pool resources.
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Notes
For empirical tests of this model, analysing the effects of legislature size on spending levels and deficits, see, inter alia, Bradbury and Crain (2001), Ricciuti (2004), Primo (2006), and Gilligan and Matsusaka (1995, 2001). Inman and Fitts (1990) and Mukherjee (2003) called for counting the number of legislators in the governing majority rather than the total number of legislators. For empirical tests examining the effects of the size of governing majority in the legislature, see Lagona and Padovano (2007), Volkerink and de Haan (2001), Elgie and McMenamin (2008), Huber et al. (2003), Leachman et al. (2007), and Mierau et al. (2007).
Mukherjee (2003) posits, drawing on the law of 1/n, that the larger the effective number of parties in the legislature, the higher is central government expenditure, because the total number of projects that have to be incorporated in the budget is larger. Crepaz and Moser (2004, p. 271) also argue for using the effective number of parties in the parliament rather than the number of parties in the governing coalition when exploring the effects of the number of participants in the budgetary game on levels of expenditure, because this captures better the compromises and logrolls that take place between governing and opposition parties.
For empirical tests of the effects budgetary institutions on fiscal outcomes, see de Haan and Sturm (1994), de Haan, Moessen and Volkerink (1999), Leachman et al. (2007), Helland (2000), Lagona and Padovano (2007), Alesina et al. (1999), Fabrizio and Mody (2006), Filc and Scartascini (2005), Berger et al. (2007), Hallerberg and Marier (2004), and Perotti and Kontopoulos (2002).
The only extensive discussion can be found in Jakee and Turner (2002), who examine how the institutional conditions necessary for governing common-pool resources could inform the discussions on the sustainability of the welfare state.
Conversely, when the assurance problems are left unaddressed, ‘Incentives for fiscal prudence are low because even if specific interest groups do not push for a larger share of spending for themselves, they will still have to suffer consequences of overspending.’ (Balassone and Kumar 2007, pp. 25–26).
For an empirical application of this framework, see Spiller and Tommasi (2003).
Mukherjee (2003), for example, demonstrates that the size of the governing majority and the level of expenditures have a “cube relationship”: the government expenditure first decreases when the majority party’s size grows above 50%, then increases when its size is between 56 and 68%, and decreases again when its size is greater than or equal to 68%. As Mukherjee argues, when the margin of majority grows from a bare 50% majority to 56%, the hedge against potential defections increases and the need to include other parties in the winning coalition is reduced, which, in turn, implies that the need to incorporate additional pork-barrel expenditures to gain the support of other minority parties declines. The reason why expenditures start growing again (beyond a threshold of 56%) is that the marginal costs incurred by each majority party member from higher expenditure become lower and the tax costs of expenditures can be externalised to legislators belonging to opposition parties. When the margin of majority reaches about 68%, however, the possibilities to externalise tax costs to opposition members start declining and the governing majority has to internalise most of the costs implied by increased expenditures, which, in turn, would lead them to prefer lower levels of expenditures.
Huber et al. (2003) argue that in coalition governments with one strong party, the dominating party can put pressure on the relatively weaker party (or parties), who would have to bear a significant portion of the adjustment costs in stabilising the budget.
Steinmo and Tolbert (1998) predict that dominant coalition polities have the electoral stability to engage in long-term tax commitments resulting in higher tax burdens, whereas shifting coalition governments tend to engage in short-term tax policy negotiations, leading to more moderate tax burdens. In majoritarian polities, they expect political and economic interests to demand short-term public policies, which would lead to lower overall taxation.
At the same time, one has to keep in mind that heterogeneities ‘do not have a determinant impact on the likelihood or success of collective action’ since groups can overcome ‘stressful heterogeneities by crafting innovative institutional arrangements well-matched to their local circumstances’ (Varughese and Ostrom 2001, p. 762).
Thus, institutional rules shape political action situations by defining the kinds of positions, the number of persons that can hold a particular position, how participants are chosen to hold the positions and how they have to leave, the set of actions assigned to different positions, decision functions to be used at particular nodes, the channels of communication between participants in positions, the costs or external inducements associated with sets of outcomes, and how benefits and costs have to be distributed to those holding the positions (Ostrom 1986, p. 19).
Hence, in analysing the distributive politics on legislative budgetary commons, an important question is: Would distributive politics be characterised by minimum-winning coalitions or universalistic coalitions? Although according to Riker (1962), one would expect vote-trading coalitions to be minimum-winning coalitions, since every ‘unnecessary’ member included in the deal would reduce the payoff for the members in the coalition, these predictions have not found consistent confirmation in actual distributive policy-making (see, e.g., Fiorina 1981). In a pursuit to approximate the legislative realities and formal modelling, Weingast (1979) argues that the norm of universalism is driven by inherent instability of minimum-winning coalitions, which in turn arises because there are no legally binding agreements between legislators.
As Collie (1988, p. 433) rightly points out, the main problem with the model put forth by Weingast (1979), was that it failed to address the rational-choice prediction that the passage of inefficient particularistic expenditures (where the marginal costs of the project exceeded its marginal benefits) is individually rational only when legislators can form a minimum-winning coalition and externalise at least part of the project costs to the excluded constituencies by making use of the general tax fund. Shepsle and Weingast (1981) sought to address this puzzle by reinterpreting the ‘costs’ and ‘benefits’ associated with a given project for a specific district. They argued that the funds allocated from the general budget for a district-specific project would be presented by the legislators as ‘benefits’ to the constituencies in the district rather than ‘costs’.
Hallerberg and Marier (2004) argue that proportional electoral systems with open lists (i.e., where voters can determine the order of the party’s candidates on the list) are more conducive to personal vote than majoritarian systems. They argue that since the open-list system shifts the electoral focus from parties to individual representatives, the candidates have to appeal to voters in their home-district in order to get elected and re-elected. Hence, common-pool problems of budgeting would be most severe in proportional electoral systems with open lists and large district magnitude, followed by majoritarian systems, and least severe in proportional systems with closed lists and large district magnitudes.
For an analogous argument, see Jakee and Turner (2002).
As Krogstrup and Wyplosz (2007, p. 2) have underlined, the incumbent governments fail to internalise the full costs of incurring deficits, since at least some of the debt will be serviced by future governments. Debrun and Kumar (2007, p. 6) also note that ‘deficit bias arises because uncertainty about re-election increases the discount rate of partisan policy-makers’.
Even here, however, the informal coordination mechanism may run into difficulties when the polity is faced with extensive fiscal shock(s), which may disturb the functionality of existing elements of governance. .
Evans and Rauch (1999), for example, argue that those polities with Weberian-type bureaucracies have longer-term horizons when making public investment decisions.
The information problems with the tax fund as commons as been discussed more extensively by Jakee and Turner (2002).
A number of studies have found, for example, that the EU fiscal rules have been more effective in contract states than in delegation states, owing to functional complementarities between the contracts approach and fiscal rules (Hallerberg 2004; Annett 2006; von Hagen 2008). Hallerberg (2004, p. 194) notes that the domestic fiscal targets and the EU rules can be mutually reinforcing: the SGP can enhance the commitment of coalition partners to fiscal targets, and the institutions that contract states use for monitoring the adherence to the fiscal contract by coalition partners foster compliance with the SGP. Hallerberg, Strauch and von Hagen (2007) also observe that the impact of further centralisation of the budget process in EU countries varies according to the initial form of fiscal governance. For the “delegation states”, strengthening the elements of “delegation” (especially increasing the power of the finance minister) has contributed to lower debt growth, but adding “contracts” elements has not. Conversely, in the contract states, strengthening delegation elements has contributed less to fiscal sustainability than substantiating the “contracts” elements.
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Acknowledgments
Research for this article was carried out with the financial support of the Mobilitas Grant of the European Social Fund (Grant no. MJD43). The author would like to thank Jürgen Backhaus, Gerhard Wegner, Kenneth Kriz, Helge Peukert and Arne Weiβ for their useful comments on earlier versions of this paper. The article also draws, in part, on the author's doctoral dissertation, Constitution, Public Finance, and Transition (Raudla 2010).
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Raudla, R. Governing budgetary commons: what can we learn from Elinor Ostrom?. Eur J Law Econ 30, 201–221 (2010). https://doi.org/10.1007/s10657-010-9187-6
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DOI: https://doi.org/10.1007/s10657-010-9187-6
Keywords
- Fiscal commons
- Budgetary institutions
- Constitutional law and economics
- Institutional economics
- Constitutional economics