Principle of Interest-Pay-Say in Community-Based Environmental Management Daigee Shaw President Chung-Hua Institution for Economic Research Taipei, Taiwan

Outline 1. Challenges of community based environmental management 2. Principle of equal participation 3. Principle of interest-pay-say 4. Conclusion Outline CBEMConclusionEqual ParticipationInterest-Pay-Say

Challenges of CBEM Community-based Environmental Management (CBEM): An application of participatory democracy Setting a trend towards solving environmental problems using local capacity However, some questions are raised CBEM is suitable for which types of environmental management? How to distribute responsibilities and benefits among stakeholders? This paper addresses the 2nd question Attempts to provide proper incentives using the principle of interest-pay-say in order to offer a solution CBEM OutlineEqual ParticipationConclusionInterest-Pay-Say

Problems of Decentralization Difficulties in internalizing externalities between communities Endangering equity by channeling resources into the hands of local elites Free-riding: With a small and equally distributed share of voice, each stakeholder has few incentives to monitor the management of commons Outline CBEM Equal ParticipationInterest-Pay-SayConclusion

Economics of the Firm Orthodox Neoclassical Theory of the Firm Profit maximization subject to technological conditions (production function) View the firm from outside FrictionlessCooperation No self-interest However, if we view the firm from inside Incentive to integrate, cooperate? Metering problem (Alchian and Demsetz, 1972) Rent-seeking (Tullock, 1967; Krueger, 1974) Agency problems (Jensen & Meckling, 1976) Outline CBEM Equal ParticipationInterest-Pay-SayConclusion

Economics of the Firm Many forms of firms: One-man firm Partnership Not-for-profit organization The traditional Soviet firm Socialist labor-managed firms The labor-owned firm Stakeholder-owned firm Outline CBEM Equal ParticipationInterest-Pay-SayConclusion

Principle of Equal Participation (theoretical model) Equal Participation The commons concerning n individuals A community-based public good management system Let C i be individual i’s input (the level of effort s/he would like to make for the management of the commons). Total input C = ΣC i Total output B =a C The output gained by individual i is B i = b i B Individual i’s utility U =U (B i, C i ) OutlineCBEMConclusionInterest-Pay-Say

Principle of Equal Participation (theoretical model) Equal Participation Based on the principle of equal participation b = 1/n Each individual has the same share of output which is irrelevant to each individual’s contribution First-order condition maximizing the utility of i First-order condition maximizing the utility of i Marginal rate of substitution of benefit for effort = marginal rate of transformation divided by the number of individuals Free-riding deters the willingness to contribute to management. The tragedy of the commons and efficiency loss hence occur. OutlineCBEMConclusionInterest-Pay-Say

Principle of Equal Participation (application) Everyone is entitled to have a say in national or local policies in most democratic countries (e.g., the US, the UK, Canada and EU). - Keeping the drafts of policies open for public discussion - However, most of the comments come from interest groups and related industries rather than ordinary residents who may be affected to a rather large extent ConclusionInterest-Pay-Say Equal Participation CBEMOutline

Principle of Equal Participation (application) Community forest management in Meghalaya (India) - A democratic way of management that increases participation has been introduced to replace the traditional consensus from selected adult males. - However, the emergence of a new elite dominates the decision-making process due to the introduction of the democratic way of management to replace the traditional consensus presents a threat to the voice of the local people (Nongkynrih 2006). OutlineCBEM Equal Participation Interest-Pay-SayConclusion

Principle of Interest-Pay-Say (theoretical model) Def: A proportional share of interests and financial contributions corresponding to votes b i = C i / ΣC i b i = C i / ΣC i Then, FOC: Marginal rate of substitution in utility terms = marginal rate of substitution of production The share of benefit compensates the effort. Therefore, each individual is willing to contribute to the optimal level. Interest-Pay-Say ConclusionEqual ParticipationCBEMOutline

Water Boards of the Netherlands - Integration of various interests - Allocation of the share of participation according to the interests & responsibility that channel the costs & benefits for each individual % representation of the interests Principle of interest-pay-say Principle of interest-pay-say Principle of Interest-Pay-Say (application) Conclusion Interest-Pay-Say Equal ParticipationCBEMOutline

Water associations (Genossenschaft) in North Rhine-Westphalia, Germany - Principle of interest-pay-say - Famous for their efficiency of water management water management Principle of Interest-Pay-Say (application) ConclusionEqual Participation Interest-Pay-Say CBEMOutline

Conclusion Conclusion Challenging the appropriateness of applying the principle of equal participation in community-based environmental management. Advocating the principle of interest-pay-say as an alternative Reason: Offering proper incentives to meter, integrate, cooperate, and to solve Rent-seeking problem Agency problems Not only good for environmental management, but also for providing other kinds of public goods Equal ParticipationInterest-Pay-SayCBEMOutline

Conclusion Those who are interested in the decision-making have a corresponding proportion of responsibility (financial contributions) and rewards (votes). Providing an alternative view of equity that takes differential interests and capacity into account. A proper institutional design can strengthen the aspects of expertise, information and incentives 100% representation of the interests Offset or minimize the concerns of equity loss caused by the deviation from the principle of equal participation. CBEM Conclusion Interest-Pay-SayEqual ParticipationOutline