By Larry Marsh, Kansas City Star Midwest Voices columnist

Elinor Ostrom of Indiana University in Bloomington and Oliver Williamson from the University of California at Berkeley won the Nobel Prize in Economics for their work on economic governance and the organization of cooperation.

The problem of managing common property is an important problem in economics. In some cases if common property is poorly managed it can be over-exploited as a common property resource. Over-fishing or pollution of lakes and streams can be caused by poor common property management. This problem is referred to as the tragedy of the commons.

At the other extreme common property can be unexploited or underexploited as explained by Michael Heller in his book "The Gridlock Economy." Heller notes that joint ownership can make negotiating a contract almost impossible when each member has veto power. Ostrom's research explains how common property can be managed effectively.

Ostrom's contribution is explained in detail in her 1990 book "Governing the Commons." She noted that earlier work by economists offered three dominant models of collective behavior which are (1.) the tragedy of the commons, (2.) the prisoners's dilemma, and (3.) the logic of collective action. These earlier models of collective behavior assume a free rider problem where there is no trust and everyone is out for themselves. A free rider is someone who takes the benefits from common ownership without paying his or her fair share of the costs. Ostrom's work shows what happens when participants do not act as free riders but instead trust one another and cooperate to achieve a better outcome for all.

Williamson's research has included work on the difference between the way markets perform when participants act as anonymous actors versus when personal relationships are formed between producers and their suppliers. Transaction costs can be quite different depending upon how market participants relate to one another. At one extreme market participants can be entirely unrelated dealing only in arm's length transactions. At the other extreme transactions can take place entirely within a firm which can substantially alter transaction costs. Again, as with Ostrom's work, Williamson research examines the role of trust and cooperation in forming and maintaining relationships.

The problems of economic governance and managing common property play are important issues in economics. Ostrom and Williamson certainly deserve the Nobel prize for their insightful contributions to dealing with the role of trust and personal relationships in economics.

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Also see:

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Deprive petro-dictators of oil money with a price floor on crude oil imports

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