3.4 Institutional change
Most institutional change is incremental. Dovers (2001) sees purposeful incrementalism capable of producing profound change. In his opinion, initiatives in Australia have been in the nature of disjointed incrementalism, characterised by adhocery and amnesia. Of course it is not easy to keep a complex institutional system internally consistent, compatible, and cohesive over time. A proliferation of specific detailed rules is not a sign of good governance. As rules proliferate the system becomes dysfunctional.
3.4.1 Institutional reform
Enhancing the coordinative power of institutions is an important aspect of institutional reform (Epstein, 1995). It is useful to consider institutional reform in first and second-order terms (Sharp, 1996a).
First-order reform refers to getting the basics of institutional structure aligned with policy objectives. For example, two key institutions – tradable rights working within a sustainable harvest – underpin New Zealand’s quota management system. Second-order reforms are marginal adjustments occurring within the basic structure. These reforms might be internal to the industry – as evidenced by the formation of quota owner associations in the fishing industry – or external when the rights to harvest were re-defined from being a tonnage to a percentage of the allowable commercial catch.
3.4.2 Evolution of property rights
A property right is a socially enforced right to selected uses of an economic good or service. Alternative views on how property rights came into being will not the discussed here (Libecap, 1986). The idea is to look at how and why existing institutions change in response to changes in variables such as demand, factor endowments and technology. Establishing and protecting property rights is an economic activity. It is useful however to consider the economic variables that affect property rights (Anderson and Hill, 1975). If we represent activity by X then an increase in X suggests an increase in search activity. Marginal benefit (MB) depends on the asset’s value and the degree to which the activity enables value to be captured. As scarcity increases we might expect individuals to attempt to better define rights. The marginal cost (MC) of producing property rights increase because of the opportunity cost of resources used in property rights activity. Anderson and Hill use this model to explain and predict the evolution of property institutions. Exogenous changes, for example increased theft and crime, to the probability of being able to capture the benefits would reduce the benefit function. Similarly, if the asset’s value increased because of price increases (for example, the price of timber) would shift the benefit outwards. Changes in technology and a fall in the price of inputs would work to lower the MC curve. For example, advances in surveillance monitoring systems would contribute to lowering the marginal cost of rights based systems of governance.
