CHAPTER 1

COLLECTIVE-ACTION PROBLEMSAND INNOVATIVE THEORY

1.1. COLLECTIVE-ACTION PROBLEMS, POLITICAL ECONOMY,AND EXCHANGE

Collective-action problems (CAPs) arise from any deviation between unfettered pursuit ofindividual goals (typically, self-interest) and the perceived well-being of at least a portion ofsome group&mash;be it a nation, region, community, firm, or sports club. Because CAPs representthe archetypal dilemma of strategic interaction among purposeful agents, and becauseexchange underlies economic and social development, the relationships between collectiveaction and exchange serve as the unifying principle of this book. Collective-action problemsreveal the logic behind multiple market failures, notably those associated with publicgoods, externalities, common-pool resources, and problems of coordination and enforcement.Furthermore, market success depends on resolving CAPs, especially those related tocoordination and enforcement. Thus CAPs and the potential for their resolution lie at thefoundations of political economy.

There are two basic types of collective-action problems: first- and second-order CAPs.First-order CAPs signify free-rider problems that are associated with providing public goods,reducing the production of negative externalities, increasing the production of positive externalities,and limiting the use of common-pool resources to sustainable levels. We defineall of these terms broadly. For example, an institution is a public good, as is establishing asense of trust that facilitates exchange within a community. Second-order CAPs are problemsof orchestrating the coordination and /or enforcement needed to render agreementsfor resolving first-order CAPs credible. Indeed, coordination and enforcement are themselvestypes of public goods&mash;namely, public goods that lend credibility to agreements.

Collective-action problems matter for political economy not only because they representkey linkages between politics and market exchange, but also because they indicate thecore rationale for economic and social policy. Most policies seek to resolve or ameliorateCAPs (with varying degrees of success or failure). More fundamentally, the existence offirst-order CAPs signifies market or group failure, and successful exchange requires someprior resolution of second-order CAPs. In fact, resolution of second-order CAPs precedesreliable definition and enforcement of the property rights that underlie market exchange.Furthermore, such resolution facilitates the formation of institutional environments, aswell as the associated mutual understandings and trust that allow multiple forms of economic,political, and social exchange to occur at all. Resolution of collective-action problemsthus underlies all substantive economic, political, and social development.

1.2. ANALYTICAL APPROACHES TO COLLECTIVEACTION AND EXCHANGE

Much of the motivation for this book arises from relatively recent developments in gametheory, economics, and policy theory. These developments both expand and refocuspolitical-economic inquiry. They permit the formalization and modeling of principles thatpreviously had been too complex or considered too indeterminate&mash;and were thus relegatedto the sidelines of analysis until recently. Our summary of these developments servesthree purposes: it offers intellectual context, points to general methodology, and outlinesimportant concepts that will appear in the remainder of this text.

Our discussion now proceeds to thumbnail sketches of eight critical realms of newlyemerging theory: game theory, social network analysis, information economics, socialpreference theory, rationality theory, institutional and governance theory, policy theory,and spatial-location theory. This section concludes by merging these ideas into a unifiedconception of game-theoretic political economy that summarizes the book's coreassertions.

Game Theory

If CAPs represent the archetypal strategic dilemma for political economy, then game theoryoffers its methodological bedrock. Formally, game theory facilitates modeling strategic interactionamong two or more agents. Strategic interaction occurs whenever agents sharestrategic interdependence&mash;meaning that their actions affect outcomes for others and thatagents typically understand such interdependence. In an oligopoly, for instance, one firm'sproduction can affect the quantities produced and prices set by other firms. Similarly, a decisionby a contractor to hide mistakes can affect its client's profits. In political campaigns,one candidate's...