Unit 5 The rules of the game: Who gets what and why
5.5 Institutions, and the case of the independent farmer
As a starting point—our baseline case—it is helpful to think about what Angela would choose to do if she owned the farm herself. How many hours would she work, and how much grain would she consume? Then we consider three different institutional settings in which Bruno owns the land. For each case, we identify the total amount of grain produced, hours worked by Angela, and how much grain Angela and Bruno each get. We will then explore how the outcomes differ depending on the rules of the game.
Figure 5.6 summarizes how the rules of the game differ between the cases:
- property rights
- Legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned. Property rights may cover broadly-defined goods such as clean water, safety, or education, if these are protected by the legal system.
- How Angela’s work hours are determined: by her, by Bruno, or by the two bargaining
- Angela’s alternatives (her next best opportunity): attempted escape from Bruno’s coercion, taking a different job
- The part played by the government: enforcing Bruno’s coercion over Angela, protecting her personal autonomy but enforcing Bruno’s property rights, facilitating bargaining between the two subject to approval by an elected state.
An independent farmer Baseline case: Angela owns the land |
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Angela owns the land herself. The government protects her right to exclude others from the land (or its produce). Angela decides: how many hours to work and how much grain to produce and consume. |
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A landowner and a farmer Bruno owns the land and Angela farms it What happens depends on the institutional setting |
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Case 1 Forced labour |
Case 2 A take-it-or-leave it contract |
Case 3 Bargaining in a democracy |
The rules of the game | ||
Bruno can force Angela to work for him producing grain which he owns. Bruno decides: how many hours Angela must work, and how much grain she can consume. Angela decides: Obey, or attempt escape or, with other farmers, revolt (in both latter cases risking death). |
Bruno offers Angela a contract (either an employment contract, or a farm tenancy) which she can accept or reject. There is no scope to negotiate over the contract terms. Bruno cannot physically threaten Angela, and she can refuse the offer and seek work elsewhere. If necessary, the government will protect Bruno’s property rights and enforce a contract. Bruno decides: what contract to offer Angela. Angela decides: Accept or reject Bruno’s contract. Also, if she accepts a tenancy, how many hours to work. |
Bruno offers Angela a contract. Angela can accept the contract, reject the contract, or negotiate for alternative contract terms. Angela and other farmers are able to vote, enabling them to elect a government that will pass legislation limiting the maximum number of hours worked and stipulating a minimum wage equal to what she would have earned in Case 2. Bruno and Angela bargain: Angela, and others, vote in order to improve their options. Then she and Bruno negotiate a contract. |
Figure 5.6 The rules of the game in different institutional settings.
Baseline case: Private ownership by an independent producer
We begin with the case in which Angela owns the land that she farms. She chooses her own working hours, and consumes the grain she produces. There is no other character in this case—only Angela, so this is not a social interaction and the question of income distribution does not arise.
Land tenure institutions
Ownership of land by individuals or households is a form of private property, meaning that the owner can exclude others from the use of the land or enjoyment of its products and is free to sell or give away the property. Private ownership is one of many land tenure institutions, that is, rules (written or informal) that govern who can use and buy or sell land and the conditions under which use, sale, and purchase can take place. Aside from private ownership, other forms of land tenure include communal tenure (for example, where members of a community may have the right to graze cattle on a common pasture); open access, where specific rights are not assigned to anyone and no-one can be excluded (such as oceans and some forests); and state ownership, where property rights are assigned to some authority in the public sector such as the national or state government.
Angela’s ownership of the land means that she can exclude others from using it or from receiving any of its produce. The government will enforce this right if necessary, penalizing anyone who attempts to violate it.
Angela’s decisions as an independent producer
When Angela can choose how to run the farm for herself, consuming all the grain she produces, she faces a constrained choice problem just like the one we analyse for Karim in Unit 3. She wants to find a point in the feasible set of combinations of free time and consumption that gives her the highest possible utility.
Like Karim, she will choose the point where the feasible frontier reaches the highest possible indifference curve. Work through Figure 5.7 to find how much grain she will produce, and how much free time she will take.
The diagram shows that Angela will choose point A, with 16 hours of free time and 46 bushels of grain, where her two trade-offs balance: the trade-off she is willing to make between grain and free time (her MRS) is equal the trade-off she is constrained to make by her technology (the MRT).
Thinking about the trade-offs gives you another way to understand why this is the best she can do. Suppose, for example, that she had chosen to have more than 16 hours of free time. Then her feasible frontier is steeper and her indifference curves are flatter than at A, so MRT > MRS. This means she could transform an hour of free time into more grain than the least amount she would be willing to accept for the loss of free time. So she can increase her utility by reducing her free time. Similarly, if she had chosen to have less free time, where MRT < MRS, she could increase her utility by taking more free time and having less grain.
We can think of the combination of free time and grain at point A as a measure of Angela’s standard of living. Figure 5.8 summarizes the outcome.
Angela’s hours of free time | 16 |
Angela’s bushels of grain | 46 |
Bruno’s bushels of grain | n/a (Bruno is not a character in this scenario) |
Figure 5.8 The outcome in the baseline case.
This is the best she can do as an independent farmer. In the following sections, we consider each of the three cases in which Bruno owns the land. As you might expect, Angela’s standard of living will be lower when she works for Bruno.
Question 5.2 Choose the correct answer(s)
The figure below shows Angela’s feasible frontier and some of her indifference curves. Based on this information, read the following statements and choose the correct option(s).
- At point B, the slope of Angela’s indifference curve (her MRS) is steeper than at point A, due to diminishing marginal utility (of free time).
- If Angela moved to the right along the feasible frontier, away from point B, she would increase her utility until she reached point A. For example, at 12 hours of free time, the indifference curve that cuts the feasible frontier would be higher than the indifference curve passing through point B (this indifference curve is not shown in the diagram).
- The opportunity cost of grain production is the MRT. The amount of grain that Angela is willing to give up for an additional hour of free time is given by the MRS. At point B, the feasible frontier is less steep than IC3, which indicates that MRT < MRS.
- Angela would not choose point C because it is unattainable with the given technology.