张五常英文论文1970：合约结构与外部效应

The Structure of a Contract and the Theory of a Non-Exclusive Resource Steven N. S. Cheung Journal of Law and Economics, Vol. 13, No. 1. (Apr., 1970), pp. 49-70. Stable URL: http://links.jstor.org/sici?sici=0022-2186%28197004%2913%3A1%3C49%3ATSOACA%3E2.0.CO%3B2-4 Journal of Law and Economics is currently published by The University of Chicago Press. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/ucpress.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers, and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Sat Dec 8 02:50:43 2007 THE STRUCTURE OF A CONTRACT AND THE THEORY OF A NON-EXCLUSIVE RESOURCE* STEVEN N . S. CHEUNG Univevsity of Washington T n E process of arriving a t a useful concept of analysis is not only slow and painful, but also may go astray and attain nothing useful. Someone begins with one example or observation, followed by a theory which is intuitively plausible. A theoretical term associated with a vague concept is coined. Examples of a seemingly different type emerge, which call for an- other theory. The process goes on. As examples and theories continue to accumulate, the different categories under the same heading of analysis serve only to confuse, and each associated theory becomes ad hoc. Such has been the fate of the concept of "e~ternality."~ A more useful approach, I think, is via contractual conditions. The example chosen for illustration is marine fisheries, where the fishing right is taken *This paper is an expanded version of my Contractual Arrangements and Resource Allocation in Marine Fisheries, which was prepared for the Proceedings of the H. R. MacMillan Symposium on the Economics of Fishing, held at the University of British Columbia, Vancouver, April, 1969. The first two drafts were written at the University of Chicago. Thanks for financial support are given to the Ford Foundation grant for International Studies at the University of Chicago, and to the Institute of Economic Research a t the University of Washington. The thesis of this paper was germinated by a set of equations which yield the tradi- tionally accepted conclusions of the "common pool," but in which the constraint pre- scribed for the Langrangian expression has no economic content. Turning to a more elementary analysis, I was surprised at my inability to define meaningfully "externality" for what I believed to be the simplest case. A subsequent review of the literature left me deeper in doubt. To raise a noticeable voice amidst a commotion requires the support of other voices of the same tone. And I definitely would have given up shouting except for R. H. Coase's advice and encouragement at every turn. I am also grateful to friends who either cheered for me from the side line, or commented on one draft or another. They include David Anglin, Amen A. Alchian, Yoram Barzel, Zvi Griliches, D. Gale Johnson, Harry G. John- son, Patricia Kuttner, John McGee, John McManus, Theodore W. Schultz, Anthony D. Scott, Vernon L. Smith, and George J. Stigler. While ideas are not exclusive, errors are exclusively mine. 1 F o r a fairly comprehensive count, see E. J. Mishan, Reflections on Recent Develop- ments in the Concept of External Effects, 31 Can. J. Econ. & Pol. Sci. 3 (1965). Note, however, that the number of "externalities" has increased rapidly in the subsequent four years. 49 50 THE JOURNAL OF LAW AND ECONOMICS as non-exclusive, and where most economists agree that "externalities" exist in several direction^.^ I n the absence of exclusive rights to the use of the fishing ground: the right to contract so as to stipulate its use does not exist. This implies the absence of contractual stipulations governing resource use which would exist if the fishing ground were private property, thereby altering the constraint of competition and affecting resource allocation in a number of ways. The alleged "externalities" in fisheries are thus attributable to the absence of the right to contract. Combining resources of several owners for production involves partial or outright transfers of property rights through a A contract for~on t r a c t . ~ the partial transfer of rights, such as leasing or hiring-embodies a structure. The stipulations, or terms, which constitute the structure of the contract are, as a rule, designed to specify (a) the distribution of income among the participants, and (b) the conditions of resource use. Under transferable rights, these stipulations are consistent with, or determined by, competition in the marketplace. As shown el~ewhere,~ contracts is deter- the choice of mined by transaction costs, natural (economic) risks, and legal (political) arrangements. However, the familiar market prices are but one among many of the contractual terms (indeed, in share contracts, prices are not explicitly specified). With private property rights governing the use of all resources, the pos- tulate of wealth maximization implies that the contractual stipulations are designed to maximize the return to all resources subject to the constraint of competition. Assume away the costs of transactions, the contractual stipula- tions for every resource use will be so designed that they are consistent with the equimarginal principle. I n general, the structure of the contract will be such that the marginal gain and cost are equal. I n specific details, however, 2 See, for example, Ralph Turvey, Optimization and Suboptimization in Fishery Reg- ulation, 54 Amer. Econ. Rev. No. Z., Pt. 1, a t 64 (1964); and Vernon L. Smith, On Models of Commercial Fishing, 77 J. Pol. Econ. 181 (1969). 3 What resource in marine fisheries is non-exclusive-the ocean bed, the water, o r the fish? The answer is that any productive resource is multi-dimensional, and the term "fishing ground" is chosen to include all of them. This term is used synonymously with L'fishery resource" or "fishing rights" in this paper. 4 If only outright transfers exist for all resources, then only owner production will exist, and contractual stipulations on resource use will be absent. Partial transfers, such as leasing and hiring, are emphasized here because (1) they lead more directly to the problems involved and ( 2 ) they serve to illustrate more clearly the function of a contract. 5 Steven N. S. Cheung, Transaction Costs, Risk Aversion, and the Choice of Contrac- tual Arrangements, 12 J. Law & Econ. 23 (1969). STRUCTURE OF A CONTRACT 5 1 the elements constituting gains and costs are multiple and the marginal equalities of a constrained maximization are several. Since to satisfy one particular marginal equality, one or more contractual stipulations, im- plicitly or explicitly, are required, pages of stipulations in one contract can be found. Two questions immediately arise. First, given the contractual stipulations, do we know that the required marginal equalities are satisfied? And second, what bearing do these stipulations have on the actual outcome of income distribution and resource allocation? The answer to the first is that we know at least whether the stipulations are consistent with the requisite marginal equalities. The stipulations of a contract may be inconsistent with marginal equality of resource use (for example, a contract stipulating only a lump-sum charge without quantity stipulation); or the contract may not exist, implicitly or explicitly, as in the case of the use of a non-exclusive right. A defective contract, or the absence of a contract, does not necessarily imply economic inefficiency, and can be traced either to the presence of transaction costs, the existing legal arrangements, or the lack of foresight and the costs of Theinf~rmat ion.~ second question-the relation between a set of stipulations and the actual outcome-is one of contractual enforcement. While one may argue that non- enforceable stipulations will not be present in a contract, for our present purpose it suffices to point out that the absence of a contract will lead to different resource use than when an enforceable contract exists. But the main point here is that a contract may encompass a large set of stipulations, governing a set of marginal equalities associated with various aspects of resource use. If outright transfers exist for all resources engaged in production, the owner alone is responsible for the decision aspects. If partial transfers exist, then the contracting parties mutually negotiate the terms. For any production process, multiple contracts may exist. Given the form of contract, the stipulations would be more complex the more complex the physical attributes of inputs and outputs. I t has become increasingly clear to me that the mushrooming of alleged "externalities" is attributable to either (1) the absence of the right to contract, ( 2 ) the presence of a contract but with incomplete stipulations, or ( 3 ) the presence of stipulations that are somehow inconsistent with some marginal equalities. Among these cases, however, differences are only a matter of degree. Since the conceivable number of different contractual stip- 6 See R. H. Coase, The Problem of Social Cost, 3 J. Law & Econ. 1 (1960) ; George J. Stigler, The Economics of Information, 69 J. Pol. Econ. 213 (1961); and Harold Demsetz, The Exchange and Enforcement of Property Rights, 7 J. Law & Econ. 11 (1964). 52 THE JOURNAL OF LAW AND ECONOMICS ulations is very large, the rapid growth rate in the literature in recognizing "new" externalities is natural. As an example, let us examine marine fisheries, wherein the right to use the fishing ground is said to be non-exclusive and hence the right to contract is absent. The assumed condition of a lack of exclusive right to use the resource, free of institutional regulations, does not, of course, correspond to the real world where rules and regulations established by governments and unions are n~merous .~ The issue of regulation versus voluntary contractual arrangements in the marketplace will be discussed briefly in section IV. Fish, like rice or any other growing (biological) asset, require "planting" as well as "harvesting." Different physical attributes of such resources, how- ever, will lead to different degrees of emphasis on the alternative options of choice. In general, decisions will be made on the product to be produced, the method of production, the amount and type of investment over time, the financial maturity of the catch, and the intensity and method of harvesting. With private property rights, these decisions will result in stipulations mutually negotiated by the contracting parties (for example, the fishing- ground owner, the boat owner and the fisherman). Although the stipulations differ when the forms of contract differ, the implied resource use may not. In the absence of exclusive rights governing the use of the fishing ground, not only will the intensity of its use be affected, but also the costs of policing (enforcing) the income generated by other private investment inputs will be higher. Higher policing costs will affect decisions pertaining to planting and financial maturity. For example: if the right to the use of land is non- exclusive, the cost of policing private fertilizers applied to land for the production of corn will be higher than if the land use is exclusive and is sub- ject to contractual stipulation and enforcement. That is, if private landowner- ship obtained, the owner could enter a contract with labor and fertilizer owners, and restrict non-participants from interfering in any undesirable way. The right to contract is also the right to exclude. The same applies to the non-exclusive fishing ground, despite the different physical attributes of fish and corn. Some implications are: (1) The choice of product will be constrained by the higher costs of guard- 7 The literature is immense. See, Francis T. Christy, Jr. & Anthony Scott, The Com- mon Wealth in Ocean Fisheries (1965) ; James Crutchfield & Arnold Zellner, Economic Aspects of the Pacific Halibut Fishery, Fishery Industrial Research, no. 1 (April, 1962) ; Expert Meeting on the Economic Effects of Fishery Regulations, Ottawa, 1961, Economic Effects of Fishery Regulation (R. Hamliseh ed., 1962); Myres S. McDougal & William T. Burke, The Public Order of the Oceans (1962) ; Sol Sinclair, License Limitation- British Columbia: A Method of Economic Fisheries Management (Can. Dep't of Fish- eries, 1960); and Int? Technical Conf. on the Conservation of the Living Resources of the Sea, The Economics of Fisheries (Ralph Turvey & Jack Wieman eds., 1956). Rules imposed by boat and fisherman unions can best be obtained from the unions themselves. 53 STRUCTURE OF A CONTRACT ing private investment inputs, generated by the non-exclusive use of the resource. This implies that a ~roduct , the physical attributes of which entail relatively low costs of policing private investment inputs, will be preferred by the users of the non-exclusive resource. I n Tripolitania, for example, potentially lucrative almond trees are reported to have been forsaken for cattle raising owing to the "common ownership" of land.8 This can be ex- plained by the fact that the cost of policing investment in a tree, perenially "attached" to the common land, is high, whereas cattle are driven home at night. The change in product as described results in a different composition of investment inputs; but the total value of investment may rise or fall. Furthermore, the collectable rent-a residual under non-exclusive land- ownership-will decline even before its dissipation under competition, owing to the choice of a product differing from that chosen to maximize rent under private property. Does the lack of exclusivity in the fishing ground significantly affect the choice of product in marine fisheries? One impression is that it does not, since the fishing ground appears to be amenable to concurrent uses, or the existing types of marine product might be the most valuable choices. Still, there may be too many of some fish and too few of another, or the product choice in aquaculture may be a f f e~ t e d . ~ The issue is an empirical one. ( 2 ) Given the product, some types of investment input will predictably decline when a private fishing ground becomes non-exclusive. For example, privately owned paddy-field fisheries will receive more intensive feeding than if the same fish were placed in a common lake.1° The phenomenon is again due to the higher cost of policing private feeding inputs, on account of the non-exclusive use of the common lake. In marine fisheries, the rate of return to this type of investment appears negligible, hence unimportant. But the same may not be true for all marine products. ( 3 ) The physical attributes of marine fisheries, together with policing costs, also affect the value a t maturity (size of catch) of the growing asset. Should the fishing ground be exclusively owned and its products costlessly 8 See Anthony Bottomley, The Effect of Common Ownership of Land upon Resource Allocation in Tripolitania, 39 Land Econ. 91 (1963). 9 See Anthony Scott, Economic Obstacles to Marine Development, (manuscript pre- pared for Conf. on Marine Aquaculture, Ore. St. Univ., May 1968). 10But investment of this type may not be reduced to zero. While no definitive solu- tion for this is offered here, let me suggest an approach to the problem. Assume that the cost of policing private investment is so high as to be prohibitive. Let p be the marginal rate of return on investment and r be the rate of interest. If the return to investment is non-exclusive, then given n identical people, an individual will invest if p/n 2 r. I t is, of course, possible that investment of this type be reduced to zero even if n is quite small. However, the number of individuals should be treated as a variable partly dependent on p. 54 THE JOURNAL OF LAW AND ECONOMICS enforced as private, the financial maturity of fisheries and the implied rate of rotation (that is, the mesh size) would be so chosen as to maximize wealth.ll Similarly, the time shape of the income stream of harvesting will differ from that of maximizing wealth under non-exclusive rights.12 These factors, while significant in marine fisheries, do not appear so for cattle rais- ing in common pastures, since the cost of policing cattle is lower. That is, the cost of policing privately raised fish in a L'common" ocean is higher than that of raising cattle in common pastures. The several changes in decisions pertaining to planting and financial ma- turity discussed above are only some of the more prominent effects of the absence of exclusive rights in one of the factors of production. While an exhaustive list is not attempted here, our discussion shows that since a con- tract embodies a structure, the absence of the right to contract, as with a non-exclusive resource, will affect resource allocation in a variety of ways. And since production decisions are usually several, so are the marginal equalities affected: the marginal mesh size, marginal feeding inputs, marginal product choice, and so forth. According to the current practice, these decision aspects affected by the absence of a contract are treated as different types of externalities. While, in section 111, I shall support the existing conclusion of the dis- sipation of rent under the non-exclusive use of a resource, I shall not endorse the traditionally accepted analysis through which this dissipation takes place. This section has shown that the effects pertaining to planting and financial maturity, if they occur, will in themselves reduce the collectable rent. And it is not difficult to conceive of a situation in which, by harvest time, there is nothing worthwhile to harvest. But marine fisheries have better luck. We now turn to analyze the intensity of fishery "harvesting" in two hypothetical worlds, one with private property in all resources and one with a non-exclusive fishing ground. The harvesting issue is singled out here because the existing theoretical solution has been fundamental in recent economic analysis of marine fisheries and of the "common pool." Further- more, externality is said to exist in its purest form: the catch of one fisher- 11Although the "tree-cutting" problem is well known, I refer here to an early solution by Martin Faustmann (1849), which is resurrected in M. Mason Gaffney, Concepts of Financial Maturity of Timber and Other Assets (A. E. Information Series No. 62, mimeo- graphed a t N. Carolina St. Coll., 1960). 12 The best exposition of "time shape" and wealth maximization is still found i