An anticommons problem arises when there exist multiple rights to exclude. In a lengthy law review paper, Michael A. Heller has examined “The Tragedy of the Anticommons,” especially in regard to disappointing experiences with efforts to shift from socialist to market institutions in Russia. In an early footnote, Heller suggests that a formal economic model of the anticommons has not been developed. This paper responds to Heller's challenge. We analyze the anticommons problem in which resources are inefficiently underutilized rather than overutilized, as in the familiar commons setting. The two problems are shown to be symmetrical in several respects. We present an algebraic and geometric illustration and extend the discussion to several applications. Of greater importance, we suggest that the construction is helpful in understanding the sources of major value wastage in modern regulatory bureaucracy.
It is commonly said that in 1926 General Motors was led to acquire its supplier of automobile bodies, Fisher Body, because Fisher Body held up General Motors. It is claimed that Fisher Body did this by locating its body plants far away from the General Motors assembly plants and by adapting inefficient methods of production, thus increasing both the cost of producing bidies and the profits of Fisher Body under its cost‐plus contract. This tale is factually incorrect. What General Motors acquired in 1926 was the 40 percent of the shares of Fisher Body that it did not already own. Furthermore, Fisher Body did not locate its plants far away from the General Motors assembly plants. It is also most implausible, for many reasons, that the Fisher brothers would have used inefficient methods of production. There is no evidence that a holdup occurred.
General Motors's (GM's) 1926 acquisition of Fisher Body has long served as a cornerstone of hold‐up arguments for vertical integration. This paper utilizes primary historical evidence to make three related claims. First, it shows that GM's initial investment in Fisher Body occurred primarily to gain access to the Fisher brothers' specialized human assets. Second, it shows that holdup was not the cause of GM's purchase of Fisher Body. Instead, the primary factors leading to vertical integration were GM management's fears over the Fisher brothers' impending departure, coupled with problems of financing new body plants. Finally, I show that while holdup was not an issue prior to integration, the Fisher brothers successfully held up GM after they became employees. Far from reducing opportunistic behavior, vertical integration increased GM's vulnerability to rent‐seeking behavior based in human asset specificity.
General Motors's (GM's) acquisition of Fisher Body is the classic example of market failure in the literature on contracts and the theory of the firm. According to the standard account, in 1926 GM merged vertically with Fisher Body, a maker of auto bodies, because of concerns over transaction‐specific investment and contractual holdup. That account exhibits errors of historical fact and interpretation. General Motors acquired a 60 percent interest in Fisher Body in 1919. Moreover, the contractual arrangements and working relationship prior to the 1926 merger exhibited trust rather than opportunism. Fisher Body's production technology did not exhibit asset specificity. The merger reflected economic considerations specific to that time, not some immutable market failure. We demonstrate that vertical integration was directed at improving coordination of production and inventories, assuring GM of adequate supplies of auto bodies, and providing GM with access to the executive talents of the Fisher brothers.
After working well for more than 5 years, the Fisher Body—General Motors (GM) contract for the supply of automobile bodies broke down when GM's demand for Fisher's bodies unexpectedly increased dramatically. This pushed the imperfect contractual arrangement between the parties outside the self‐enforcing range and led Fisher to take advantage of the fact that GM was contractually obligated to purchase bodies on a cost‐plus basis. Fisher increased its short‐term profit by failing to make the investments required by GM in a plant located near GM production facilities in Flint, Michigan. Vertical integration, with an associated side payment from GM to Fisher, was the way in which this contractual hold‐up problem was solved. This examination of the Fisher‐GM case illustrates the role of vertical integration in avoiding the rigidity costs of long‐term contracts.
This paper demonstrates that vertically aligned private or public organizations are capable of generating strategic trade advantage similar to that acquired through direct government export subsidization. The model considers two forms of vertical coordination that lead to advantageous trade positions in international markets: upstream vertical restraint and downstream equity sharing. Such practices are commonly employed both by state trading agencies and by priyate firms in nations with lenient antitrust laws. The finding has important implications under new World Trade Organization (WTO) rules intended to reduce government intervention in international transactions. Recent reforms in the WTO favor nations that sanction highly refined vertical linkages between firms, while nations with stringent antitrust legislation have an incentive to negotiate for greater harmonization of international laws.
The Telecommunications Act of 1996 contains provisions that allow increasing levels of concentration in local radio markets. Debate has focused on whether allowing greater concentration of broadcast media resources into fewer hands is a sound public policy. One fear of regulators is the effect of increased concentration on the market power of radio stations. Concentrating on intraindustry variations, this paper systematically assesses the link between radio station profitability and market concentration. The underlying assumption of the empirical analysis is that sale price (or present value) of the radio station includes the present value of future profits. The results do not support a strong relationship between increases in concentration and the profitability of radio stations, although we find group ownership to increase efficiency.
The education finance reforms encouraged by state court rulings over the past 25 years have led to increased state aid and educational spending in poorer school districts. This empirical study addresses whether these new resources were capitalized into the housing values and residential rents within those districts. Estimations based on district‐level census data indicate that the new educational expenditures generated by the court mandates substantially increased median housing values and residential rents. This Tiebout response implies that court‐mandated finance reforms increased the perceived quality of the poorer school districts in reform states. However, the existence and magnitude of this response also implies that these reforms had unintended distributional consequences. For example, these results indicate that for some the redistributive impact of education finance reform may have been sharply attenuated by the increased cost of residing in the districts that received new educational resources.
This article presents evidence that sexually transmitted disease (STD) rates are responsive to increases in alcohol taxes and in the drinking age. The presumed relationship is that a more restrictive alcohol policy reduces alcohol consumption, which in turn decreases risky sexual activity. Reduced‐form regressions of STD rates on state alcohol taxes for the years 1981—95 (with controls for state and year) indicate that a $1 increase in the per‐gallon liquor tax reduces gonorrhea rates by 2.1 percent, and a beer tax increase of $.20 per six‐pack reduces gonorrhea rates by 8.9 percent, with similar though more pronounced effects on syphilis rates. Quasi‐experimental analysis of alcohol policy changes supports these findings and offers evidence that increases in the drinking age reduce STD rates among youth. The estimated external cost of alcohol‐attributable STDs exceeds $556 million annually, a factor that could be considered in determining optimal alcohol policy.
We create a rotating bandit model of executive turnover in politics with autocratic presidents, large and centralized governments, and limited reelection. The model is an extension of McGuire and Olson's 1996 work. We apply our model by studying the relationship between electoral cycles and economic growth and inflation uncertainty in Mexico, a country with a highly centralized and powerful government, no reelection, and until recently, little political competition. We find a significant postelection economic collapse but no preelection boom, which is contrary to the predictions of the traditional political business cycle model. We also find evidence that elections create, rather than resolve, inflation uncertainty, which contradicts the predictions of the rational partisan model. While our rotating bandit model is largely consistent with the results we find, more work is needed on the real effects of politics in the developing world.
Recent changes in real estate law hastened the shift from a seller's agency regime, in which real estate agents serve the interests of sellers, to a buyer's agency regime, in which agents serve the interests of buyers. Using data from the Atlanta real estate market, we show that the shift to buyer's agency led to a significant decline in real estate prices in the market for relatively expensive houses, while real estate prices did not significantly change in the market for relatively inexpensive homes. In both markets, the average time needed to sell a house fell after the change in agency regimes. These results are consistent with a conclusion that a shift to buyer's agency improves the efficiency of the search process.
State governments may affect the productivity of primary and secondary education in two ways. First, various regulations imposed on local school districts are expected to make schools less efficient. Second, state efforts to reduce inequality in education spending make it more difficult for voters to increase school quality, which should lead to less voter monitoring of schools and thus less efficient schools. Our empirical analysis of state Scholastic Aptitude Test (SAT) scores from 1987 to 1992 provides evidence on both effects. The state's revenue share, which captures state meddling in local decisions, has the expected negative impact on school efficiency. But our novel result is that state‐induced spending equalization also lowers average test scores but has had little if any effect on reducing the disparity in student achievement. These results bring into question policy efforts designed to shift education responsibilities from local governments to state and federal governments.