Social Capital and Community Governance

Samuel Bowles and Herbert Gintis

Department of Economics

University of Massachusetts

Amherst,Massachusetts,01003

December22,2000

Abstract

Social capital generally refers to trust,concern for ones associates,a will-ingness to live by the norms of one’s community and to punish those who

do not.While essential to good governance,these behaviors and dispositions

appear to conflict with the fundamental behavioral assumptions of economics

whose archetypal individual—Homo economicus—is entirely self-regarding.

We regard these behaviors and dispositions as aspects of what we term commu-

nity governance.We suggest that(i)community governance addresses some

common market and state failures but typically relies on insider-outsider dis-

tinctions that may be morally repugnant;(ii)the individual motivations sup-

porting community governance are not captured by either the conventional

self-interested preferences of Homo economicus or by unconditional altruism

towards one’s fellow community members;(iii)well-designed institutions

make communities,markets and states complements,not substitutes;(iv)

with poorly designed institutions,markets and states can crowd out commu-

nity governance;(v)some distributions of property rights are better than oth-

ers at fostering community governance and assuring complementarity among

communities,states and markets;and(vi)far from representing holdovers

from a premodern era,the small scale local interactions that characterize

communities are likely to increase in importance as the economic problems

that community governance handles relatively well become more important.

∗For a symposium submitted to the Economic Journal,along with companion papers by Steven Durlauf,Glenn Loury and Edward Glaeser,David Laibson,and Bruce Sacerdote.Thanks to Katie Baird,Michael Carter,Jeff Carpenter,Christina Fong,Yujiro Hayami,and Elisabeth Wood for help and comments,as well as to the MacArthur Foundation forfinancial support.The authors may be contacted at bowles@econs.umass.edu,http://www-unix.oit.umass.edu/˜bowles,and hgin-tis@mediaone.net,http://www-unix.oit.umass.edu/˜gintis.

1Social Capital and Community Governance2

1Introduction

Social capital generally refers to trust,concern for one’s associates,a willingness to live by the norms of one’s community and to punish those who do not.These behav-iors were recognized as essential ingredients of good governance among classical thinkers from Aristotle to Thomas Aquinas and Edmund Burke.However,po-litical theorists and constitutional thinkers since the late18th century have taken Homo economicus as a starting point and partly for this reason have stressed other desiderata,notably competitive markets,well-defined property rights,and efficient, well-intentioned states.Good rules of the game thus came to displace good citizens as the sine qua non of good government.

The contending camps that emerged in the nineteenth and early twentieth cen-turies,advocating laissez faire on the one hand or comprehensive state intervention on the other as the ideal form of governance,defined the terms of institutional and policy for much of the Twentieth century.Practically-minded people who,by conscience or electoral constraint,had adopted less dogmatic stances in favor of seeking solutions to social problems,never accepted the cramped intellectual quar-ters of this debate,but itflourished in academia,as a glance at mid or even late twentieth century comparative economic systems texts will show.The shared im-plicit assumption of the otherwise polarized positions in this debate was that either the market or the state could adequately govern the economic process.There was nothing else on the menu,and mix and match was out of the question.But the common currency of this debate—inflated claims on behalf of spontaneous order or social engineering—now seems archaic.Disenchanted with utopias of either the left of the right,as the century drew to a close,and willing to settle for less heroic alternatives,many came to believe that market failures are the rule rather than the exception and that governments are neither sufficiently informed or sufficiently ac-countable to correct all market failures.Social capital was swept to prominence not on its merits,but on the defects of its alternatives.

Those to the left of center are attracted to the social capital idea because it affirms the importance of trust,generosity,and collective action in social problem solving,thus countering the idea that well-defined property rights and competitive markets could so successfully harness selfish motives to public ends as to make civic virtue unnecessary.Proponents of laissez faire are enchanted because it holds the promise that where markets fail—in the provision of local public goods and many types of insurance for example—neighborhoods,parent teacher associations, bowling leagues,indeed anything but the government,could step in to do the job.

American liberals,along with social democrats and market socialists,might not have joined in had limits of governmental capacity and accountability not been unmistakenly demonstrated in the bureaucratic arrogance and the dashed hopes ofSocial Capital and Community Governance3five year plans the world over.Conservatives might have been less avid if their once idealized institutions had fared better.But the Great Depression early in the past century,as well as growing environmental concerns and rising inequalities at its close,tarnished the utopian capitalism of the textbooks.The demise of these twin illusions of our century thus cleared the intellectual stage for social capital’s entry.

Thus,a decade ago otherwise skeptical intellectuals and jaded policy makers surprised and impressed their friends by touting the remarkable correlation between choral societies and effective governance in Tuscany,the perils of a nation that bowled alone,and the Alexis de Tocqueville characterization of America as a nation of joiners.President George Bush urged Americans to turn away from government to the“thousand points of light”of a vibrant civil society,and Hillary Clinton told us that“it takes a village to raise a child.”The World Bank dedicated a website to the subject.

The social capital boom reflected a heightened awareness in policy and aca-demic circles of real people’s values,which are not the empirically implausible utility functions of Homo economicus,of how people interact in their daily lives,in families,neighborhoods,and work groups,not just as buyers,sellers,and citizens. and of the bankruptcy of the ideologically charged planning-versus-markets debate.

Perhaps social capital,like V oltaire’s God,would have to have been invented if it did not exist.It may even be a good idea.A good term it is not.Capital refers to a thing that can be owned—even a social isolate like Robinson Crusoe had an axe and afishing net.By contrast,the attributes said to make up social capital describe relationships among people.As with other trendy expressions,“social capital”has attracted so many disparate uses that we think it better to drop the term in favor of something more precise.“Community”better captures the aspects of good governance that explain social capital’s popularity,as it focuses attention on what groups do rather than what people own.By community we mean a group of people who interact directly,frequently and in multi-faceted ways.People who work together are usually communities in this sense,as are some neighborhoods, groups of friends,professional and business networks,gangs,and sports leagues. The list suggests that connection,not affection,is the defining characteristic of a community.

In the next section we propose an alternative framework which we term“com-munity governance.”We begin with some examples,and present a simple model and some experimental evidence demonstrating the plausibility of the underlying behavioral assumptions.We then turn to some endemic problems with community governance and challenges to be addressed by those who share our conviction that policy design should recognize and enhance the complementarities among mar-kets,states and communities.1We close with some speculations about the futureSocial Capital and Community Governance4 importance of communities.

We will attempt to show that(i)community governance addresses some common market and state failures but typically relies on insider-outsider distinctions that may be morally repugnant;(ii)the individual motivations supporting peer monitoring and other aspects of community governance are not captured by either the conven-tional self-interested preferences of Homo economicus or by unconditional altruism towards one’s fellow community members;(iii)well-designed institutions make communities,markets and states complements,not substitutes;(iv)with poorly de-signed institutions,markets and states can crowd out community governance;(v) some distributions of property rights are better than others at fostering community governance and assuring complementarity among communities,states and markets; and(vi)far from representing holdovers from a premodern era,the small scale local interactions that characterize communities are likely to increase in importance as the economic problems that community governance handles relatively well become more important.

2Community Governance

Communities are part of good governance because they address certain problems that cannot be handled either by individuals acting alone or by markets and govern-ments.

In some of Chicago’s neighborhoods studied by Felton Earls,Robert Sampson, and Steven Raudenbush(1997)for example,residents speak sternly to youngsters skipping school,creating a disturbance,or decorating walls with graffiti.Residents are also willing to intervene to maintain neighborhood amenities such as a local firehouse threatened with budget cuts.These are all examples of what the authors term“collective efficacy.”In other neighborhoods residents adopt a more hands-off approach.Sampson,Raudenbush and Earls found considerable variation in the neighborhood levels of collective efficacy,with examples of rich and poor,black and white neighborhoods exhibiting both high and low levels.Remarkably,ethnic heterogeneity was considerably less important in predicting low collective efficacy than were measures of economic disadvantage,low rate of home ownership,and other indicators of residential instability.Where neighbors express a high level of collective efficacy,violent crime is markedly lower,controlling for a wide range of community and individual characteristics,including past crime rates.Chicago’s neighborhoods illustrate the informal enforcement of community norms.

The Toyama Bayfishing cooperatives in Japan studied by Erika Seki and Jean-Philippe Platteau Platteau and Seki(1999)illustrate another aspect of community 1Similar proposals are advanced by Hayami(19)and Aoki and Hayami(2000).Social Capital and Community Governance5 problem solving.Faced with variable catches,as well as the high level and changing nature of skills required,somefishermen have elected to share income,informa-tion and training.One coop which has been highly successful since its formation thirty-five years ago consists of the crews and skippers of seven shrimp boats.The boats share income and costs,repair damaged nets in common,and pool informa-tion about the changing location and availability of shrimp.Elder members pass on their skills,and the more educated younger members teach others the new high tech methods using Loran and sonar.The coop’s income-and cost-pooling activi-ties allow its boats tofish in much riskier and higher yield locations,and the skill-and information-sharing raises profits and reduces productivity differences among the boats.Fishing,off-loading the catch,and marketing by individual boats are synchronized to increase the transparency of the sharing process and make oppor-tunistic cheating on the agreement easy to detect.The poorfishing families in Kerala studied by Anita Abraham(1985)have no access to banks or formal insurance,but they cope with the vagaries of the catch by a system of multilateral zero-interest consumption loans that are unsecured by any collateral,but are always repaid.

The plywood workers who own theirfirms in Oregon and Washington benefit from both the peer-monitoring of the Chicago neighbors and the risk-pooling of the fishermen.They elect their managers and require of their members ownership of a share of thefirm as a condition of employment and employment in thefirm as a con-dition of ownership.These coops have successfully competed with conventionally organizedfirms in the industry,both union and non union,for over a generation, their success largely attributable to high levels of work commitment and savings on managerial monitoring of workers(when onefirm converted to cooperative owner-ship the supervisory staff was cut by three quarters).The econometric analysis of Ben Craig and John Pencavel(1995)indicates that total factor productivity(output per unit of labor and capital combined)is significantly higher than in their conven-tional counterparts.When faced with cyclical downturns in the demand for plywood the coops,unlike their competitors,do notfire or layoff workers,but rather elect to take cuts in either wages or hours,thus pooling the cyclical risk among all members rather than imposing it on a few(see also Pencavel2000).

As these examples suggest,communities solve problems that might otherwise appear as classic market failures or state failures:namely,insufficient provision of local public goods such as neighborhood amenities,the absence of insurance and other risk-sharing opportunities even when these would be mutually beneficial, exclusion of the poor from credit markets,and excessive and ineffective monitoring of work effort.Communities can sometimes do what governments and markets fail to do because their members,but not outsiders,have crucial information about other members’behaviors,capacities,and needs.Members use this information both to uphold norms(work norms among the plywood workers and thefishermen,Social Capital and Community Governance6 community behavioral norms in Chicago)and to make use of efficient insurance arrangements that are not plagued by the usual problems of moral hazard and adverse selection(thefishermen and the plywood workers).This insider information is most frequently used in multilateral rather than centralized ways,taking the form of a raised eyebrow,a kind word,an admonishment,gossip or ridicule,all of which may have particular salience when conveyed by a neighbor or a workmate whom one is accustomed to call one of“us”rather than“them.”

Communities thus may make an important contribution to governance where market contracts and governmentfiats fail because the necessary information to design and enforce beneficial exchanges and directives cannot effectively be used by judges,government officials,and other outsiders.This is particularly the case where ongoing relationships among community members support trust,mutual concern,or sometimes simply effective multilateral enforcement of group norms. This idea,old hat in sociology,long predates recent interest in social capital even among economists.A generation ago,Kenneth Arrow and Gerard Debreu provided thefirst complete proof of Adam Smith’s conjecture two centuries earlier on the efficiency of invisible hand allocations.But the axioms required by the Fundamental Theorem of Welfare economics were so stringent that he stressed the importance of what would now be called social capital in coping with its failure:

In the absence of trust…opportunities for mutually beneficial cooper-

ation would have to be foregone…norms of social behavior,including

ethical and moral codes(may be)…reactions of society to compensate

for market failures.(Arrow1971):22.

Communities are one of the ways these norms are sustained(Bowles and Gintis 1999,Bowles and Gintis1998).

3Communities and Incentives

The task of comparative institutional analysis today,having left behind the plan vs. market debate,is to clarify what class of problems are handled well by differing combinations of institutions.Advances in contract theory,mechanism design,game theory and relatedfields now allow economists to say quite a bit about this.Markets are attractive because of their ability to make use of private information.so where comprehensive contracts may be written and enforced at low cost,markets are often superior to other governance structures.Moreover,where residual claimancy and control rights are closely aligned,market competition provides a decentralized and difficult to corrupt disciplining mechanism that punishes the inept and rewards high performers.

Social Capital and Community Governance7 Like markets,the state is relatively well suited for handling particular classes of problems.In particular,the state is attractive because it alone has the power to make and enforce the rules of the game that govern the interaction of private agents. Therefore in cases where an economic process will be effective only if participating is mandatory(e.g.,participating in a social insurance program,or paying for national defense).

Communities,however,may solve problems that both states and markets are ill-equipped to address,especially where the nature of social interactions or of the goods and services being transacted makes contracting highly incomplete or costly. Community governance relies on dispersed private information often unavailable to states,employers,banks,and other large formal organizations to apply rewards and punishments to members according to their conformity with or deviation from social norms.An effective community monitors the behavior of its members,rendering them accountable for their actions.In contrast with states and markets,communi-ties more effectively foster and utilize the incentives that people have traditionally deployed to regulate their common activity:trust,solidarity,reciprocity,reputation, personal pride,respect,vengeance,and retribution,among others.

Several aspects of communities account for their unique capacities as gover-nance structures.First,in a community the probability that members who interact today will interact in the future is high,and thus there is a strong incentive to act in socially beneficial ways now to avoid retaliation in the future.Second,the fre-quency of interaction among community members lowers the cost and raises the benefits associated with discovering more about the characteristics,recent behavior and likely future actions of other members.The more easily acquired and widely dispersed this information,the more will community members have an incentive to act in ways that result in collectively beneficial outcomes.Third,communi-ties overcome free-rider problems by its members directly punishing‘anti-social’actions of others.Monitoring and punishment by peers in work teams,credit asso-ciations,partnerships,local commons situations,and residential neighborhoods is often an effective means of attenuating incentive problems that arise where individ-ual actions affecting the well being of others are not subject to enforceable contracts (Whyte1955,Homans1961,Ostrom1990,Tilly1981,Hossain1988,Dong and Dow1993b,Sampson,Raudenbush and Earls1997).

But how might communities enforce such norms,in the absence of the state’s judicial apparatus?A famous approach byAlchian and Demsetz(1972)suggests that residual claimancy should be assigned to an individual designated to monitor team members’inputs,thus ensuring the incentive compatibility for the(non-contractible) activity of monitoring itself,while addressing the members’incentive to free ride by the threat of dismissal by the monitor.Alchian and Demsetz’account hinges on the ad hoc assumption that monitoring itself is difficult to monitor.OtherwiseSocial Capital and Community Governance8 it would not be clear why team members should not be the residual claimants and hire a monitor to oversee their behavior.Another well-known solution(Holmström 1982)recommends a principal multi-agent relationship in which efficiency or near-efficiency is achieved through contracts that make individual team members residual claimants on the effects of their actions without conferring ownership rights on them. Hölmstrom’s solution is infeasible,however,when there are significant stochastic influences on the level of performance of the team,team members have limited wealth,and capital and insurance markets are imperfect,all of which we take to be part of the usual state of affairs.

In recent years a number of interesting contributions have suggested mecha-nisms that avoid these shortcomings.Varian(1990)and Stiglitz(1993)rely on the small size of the interacting group,and on repeated interactions with low discount rates.Banerjee,Besley and Guinnane(1994)and Dong and Dow(1993b)model and provide empirical analysis of groups such as credit or production cooperatives whose members are constitutionally empowered to punish malfeasance by fellow members.Dong and Dow(1993a)assume shirking can be controlled by the threat of non-shirkers to exit the community.

These explanations have in common that individuals are treated as self-interested. By contrast,many behavioral scientists outside of economics have sought to explain communities by relations of altruism,affection,and other non-self-regarding mo-tives.Many of these approaches,however,have treated the community organically without investigating whether or not its structural characteristics are consistent with conventional notions of equilibrium based on intentional action.In this section we develop a model using the methodologically individualism and equilibrium orien-tation of economics(specifically,game theory),together with a particular strand of those stressing other-regarding preferences,namely the commonly observed human proclivity for enforcing group norms,even at a cost to oneself.

We introduce non-self-interested motives because we believe explaining how communities enforce norms through mutual monitoring requires going beyond this traditional model of the individual actor.The treatment of social penalties by Besley and Coate(1995)and of peer pressure by Kandel and Lazear(1992)reflect a sim-ilar dissatisfaction with the conventional behavioral model.Communities often are capable of enforcing norms,we suggest,because a considerable fraction of members are willing to engage in the costly punishment of shirkers without a rea-sonable expectation of being personally repaid for their efforts.We call this behavior strong reciprocity.A strong reciprocator is predisposed to cooperate with others and punish non-cooperators,even when this behavior cannot be justified in terms of self-interest.We review the considerable evidence that strong reciprocity motives are common in Bowles and Gintis(2000).See also Fehr and Gächter(2000)and Gintis(2000).Social Capital and Community Governance9

A second distinctive characteristic of our model is that small group size is not required for the success of mutual monitoring.We have chosen to model a form of mutual monitoring consistent with large group size in light of the evidence that where individual incentives are infeasible the performance of even quite large groups—work teams of over a hundred,for example—may be enhanced by group incentives(Hansen1997,Ghemawat1995,Knez and Simester1998).

By performing a laboratory experiment involving a public goods game with punishment,we provide empirical evidence for the behavioral relevance of strong reciprocity in teams,including the fact that the willingness to punish shirkers is capable of sustaining high levels of contribution to the public good and does not decrease in larger teams.

To clarify the ways that communities and social capital might solve market failures consider the following model and related experimental evidence,which draws upon Bowles,Carptenter and Gintis(2000).

4Mutual Monitoring in Teams

Consider a team of n members.Each member can either work or shirk,and each is an equal residual claimant on team output.Suppose working costs a team member one dollar of utility,but adds q>1dollars to team output.Since output is shared equally,a member pays one dollar but his own share of the output is q/n,so the gain g from shirking is given by g=1−q/n.If g is positive,which we assume, then self-interested agents facing no other constraints or opportunities will simply shirk,so team output will be zero.However if members can be induced somehow to work,each will have net payoff q−1>0.We show that with mutual monitoring, a positive level of output can be obtained if there are a sufficient number of strong reciprocators among the team members.

Suppose team members can monitor others at cost c,with the ability to im-pose a penalty s on a team member discovered shirking.This cost s may involve public criticism,shunning,threats of physical harm and the like.We assume that acts of punishment,like work effort,are non-verifiable and hence not subject to contract.Some team members are self-interested and so never monitor or punish. However,a number k of team members are strong reciprocators,who are motivated to punish shirkers in proportion to the harm they impose on group members other than the shirker.The harm done to the rest of the team when a member shirks is z=q(1−1/n),which we refer to the social cost of shirking.We suppose that strong reciprocators experience a subjective payoffρz from disciplining a shirking member.We callρthe propensity to punish shirkers.

With the above assumptions,wefind that if the cost of monitoring is less than theSocial Capital and Community Governance10 subjective payoff to punishing shirkers(i.e.,if c<ρz)and if the gain from shirking is less than the amount of punishment a shirker can expect to receive(i.e.,if g•If these conditions hold,then they continue to hold when team size is in-creased.

•The level of monitoring increases when team size increases,although the effect is small,since g=1−q/n is close to1for large n.

•The fraction of team members who shirk remains constant when team size increases.

•The social welfare difference per team member between afirst best world with no shirking and the equilibrium of this game is c(q−1)/ρz,which does not depend on team size.

Our model of mutual monitoring in teams depends critically on the underlying behavioral assumption that strong reciprocity motives will induce sufficient pun-ishment levels to sustain high levels of team output.We ran an experimental public goods game to test this assumption,extending the standard protocol for a public goods game by making each player’s contribution to the public good known to all team members at the end of each round,and allowing players to punish others based on this information,at a cost to themselves.Fehr and Gächter(2000)used a similar experimental setting to show that there is indeed a propensity to punish, and that allowing costly punishment in a multiperiod punishment setting prevented the decay of cooperation usually found in public goods experiments.

The subjects thus play the following game for ten rounds.Subjects are ran-domizing assigned to teams of n=5or n=10members.Each player receives an endowment of money at the beginning of each round and is given an identifying(id) number from1to n.We will call the endowment“one dollar”in conformity with our analysis in the previous section(the experimental endowment was actually20‘francs,’redeemable for money at the end of the session).Each player then private contributes some portion of this dollar,say x i for player i,to the public account. The experimenter multiplies the money in the public account by a factor q>1,and distributes the proceeds equally among the players.The factor q which,as in the previous section represents the productivity of work,is chosen so that g=1−q/n is positive;i.e.,a self-interested player will contribute nothing to the public account.

The experimenter then reveals to each subject the amount contributed by the other team members,together with their id number,and allows each member,toSocial Capital and Community Governance11“assign points”to particular id numbers.Assigning one point to an id number reduced the payoff to the team member with that id number by ten percent,at a cost of ten percent of the original endowment to the“assigner.”Subjects could assign more than one point,but at increasing costs to themselves per point assigned.After each round the memberships of the teams were randomly reshuffled,so participants engaged in a series of ten non-repeated interactions.Of course even in this so called“stranger treatment”there is some small probability that one will share team membership with the same individual on another round,but we do not believe that our subjects took this into account.We used q=1.5(low productivity)for one five-person team,and q=3.75(high productivity)for the other,and we used q=3.0(low productivity)for one ten person team and q=7.5(high productivity) for the other.A total of twelve sessions were conducted with205participants.2 Each session took approximately45minutes from sign-in to payments and subjects earned$19.81on average,including the show-up fee.

We want to test the following hypotheses.

Hypothesis1:.Shirking induces punishment.

Hypothesis2:.The propensity to punish is not lower in larger teams. Hypothesis3:.Shirkers respond to punishment by increasing their contribution in the next round.

Hypothesis4:.Mutual monitoring sustains high levels of contribution to the public good.

Hypothesis5:.Altruism does not explain punishment,in the sense that players punish shirkers even when punishment does not lead to higher group earnings.

Note that hypotheses1and4replicate Fehr and Gächter(2000),while hypothe-ses2,3and5support the behavioral assumptions of the model in the previous section.

The period-by-period results averaged across treatments that appear in Figure1 strongly support Hypotheses1and4.Just as in previous public goods experiments, wefind an erosion of public contributions and rise in shirking in the treatment groups in which punishment is not allowed.By contrast,when costly punishment is allowed,we observe a striking decline in the level of shirking,and a rising willingness to punish fellow team members.The upward rising“punishment per unit of shirking”is estimated from a regression equation in which we predict the number of punishment points deployed against each member on the basis of the level of shirking the member chose on the previous round.The equation includes dummy variables for the distinct treatments.The results show that a unit of shirking initially 2In addition to the145subjects in the treatment groups,60subjects were assigned to no-punishment control sessions to verify that there is nothing unusual about our subject pool or procedures.We found that the control groups replicate the usual level and rate of decay of cooperation

Social Capital and Community Governance 12

Round 12345

6710

0.10.2

0.3

0.40.5

0.6

0.7

F r e q u e n c

y Figure 1:Shirking and Punishment.For the treatments in which punishment

is an option,it is extensively used in all periods,shirking falls over

time,and the amount of punishment per unit of shirking rises.When

punishment is not available,shirking rises over time.

induced a bit more than a fifth of a unit of punishing,rising to almost half a unit at the end of the session.All of the coef ficients reported were highly signi ficant,the lowest t -statistic,occurring in period one being 5.34.Note that the team members who engaged in increased shirking in the terminal period were severely punished (the t -statistic in the case being 10.79).The increasing punishment incurred by shirking over the rounds suggests that either the subjects were engaged in a learning process,or they became increasingly intolerant of shirking.

To test Hypothesis 2,we compare the amount of punishment per dollar of shirk-ing in the small and large treatment groups.Since the harm q caused to the group per unit of shirking differs across treatments,we much take care to compare only treatments roughly equal in this respect.The five-person,high productivity teams (q =3.75)and the ten-person low productivity teams (q =3.00)are comparable,with q slightly lower in the larger group.If group size per se discourages pun-

Social Capital and Community Governance13 ishment,we shouldfind less punishment in the large team,low q treatment.But we do not.Comparing the propensities to punish,wefind that despite the slightly lower harm that shirking inflicts,members of large teams punish more in terms of the average level of punishment,significant to the1%level.

Hypothesis3asserts that being punished leads shirkers,whom we define as those subjects who contribute less than the average level for that round,to increase their next-round contribution.We test this by regressing the change in a shirker’s public contribution between one period and the next on the punishment points received by the shirker in the earlier period as a result of his or her contribution.Wefind that the coefficient on the points received last period term is positive and significant.One punishment point assigned to a shirker results in an increase of0.38of a point in subsequent contribution.

Finally Hypothesis5asserts that players punish shirkers because they value upholding norms,per se.In other words,punishment cannot be accounted for as an instrumental strategy of altruists who want to increase the payoffs to others. Hypothesis5is sustained by the positive(indeed elevated)level of the propensity to punish in the terminal period indicated in Figure1.Punishing shirkers in this period was the last action taken before the experiment ended and so could not have been done with the expectation that the shirkers’subsequent response would benefit others.We conclude that the motivation for punishment must include the desire to inflict a cost on shirkers.

Our experimental evidence thus provides some support for the behavioral as-sumptions of our model,and for our interpretation that much of the success of community governance derives from mutual monitoring motivated by what we have termed motives of strong reciprocity.But community governance,while often effective,need not be socially beneficial.

5Community Failures

Like markets and governments,communities also fail.The personal and durable contacts that characterize communities require them to be of relatively small scale, and a preference for dealing with fellow members often limits their capacity to exploit gains from trade on a wider basis.Moreover,the tendency for communities to be relatively homogeneous may make it impossible to reap the benefits of economic diversity associated with strong complementarities among differing skills and other inputs.Neither of these limitations is insurmountable.By sharing information, equipment,and skills,for example,the Japanesefishermen exploited economies of scale unattainable by less cooperative groups,and reaped substantial benefits from the diversity of talents among the membership.Similarly cooperation in the localSocial Capital and Community Governance14 business networks in what is called“the third Italy”along with their associated local governments allow otherwise unviably smallfirms to benefit from economies of scale in marketing,research and training allowing their survival in competition with corporate giants.But compared to bureaucracies and market,which specialize in dealing with strangers,the limited scope of communities often imposes inescapable costs.

A second“community failure”is less obvious.Where group membership is the result of individual choices rather than group decisions,the composition of groups is likely to be more culturally and demographically homogeneous than any of the members would like,thereby depriving people of valued forms of diversity.To see this imagine that the populations of a large number of residential communities are made up of just two types of people easily identified by appearance or speech, and that everyone strongly prefers to be in an integrated group but not to be in a minority.If individuals sort themselves among the communities there will be a strong tendency for all of the communities to end up perfectly segregated for reasons that Thomas Schelling(1978)pointed out in his analysis of neighborhood tipping.Integrated communities would make everyone better off,but they will prove unsustainable if individuals are free to move.See Young(1998)and Bowles (2001)for models demonstrating this result.

Economists use the terms“market failures”and“state failures”to point to the allocative inefficiencies entailed by these governance structures,and so far our dis-cussion of these along with community failures has conformed to the canon.But like markets and states,communities often fail in other,sometimes more egregious ways.Most individuals seek membership in a group of familiar associates and feel isolated without it.But the baggage of belonging often includes poor treatment of those who do not.The problem is exacerbated by the group homogeneity resulting from the neighborhood tipping community failure above.When insider-outsider distinctions are made on divisive and morally repugnant bases such as race,reli-gion,nationality or sex,community governance may contribute more to fostering parochial narrow-mindedness and ethnic hostility than to addressing the failures of markets and states.This downside of community becomes particularly troubling when insiders are wealthy and powerful and outsiders are exploited as a result.

The problem is endemic.Communities work because they are good at enforcing norms,and whether this is a good thing depends on what the norms are.The recent resistance to racial integration by the white residents of Ruyterwacht(near Cape Town)is as gripping an account of social capital in action as one can imagine (Jung1998).Even more striking is Dov Cohen’s(1998)study of U.S.regional differences in the relationship between violence and community stability.With Richard Nisbett(1996)he has described a“culture of honor”that often turns public insults and arguments into deadly confrontations among white males in the SouthSocial Capital and Community Governance15 and West,but not in the North.Cohen’s research confirmsfinding that in the North, homicides stemming from arguments are less frequent in areas of higher residential stability,measured by the fractions of people living in the same house and the same county over afive year period.But this relationship is inverted in the South and West,residential stability being positively and significantly related to the frequency of these homicides where the culture of honor is strong.

6Enhancing Community Governance

Many adherents of the liberal philosophical tradition—whether conservative advo-cates of laissez faire or their social democratic and liberal socialist critics—have for these reasons seen communities as anachronistic remnants of a less enlightened epoch that lacked the property rights,markets and states adequate to the task of governance.In this view communities are not part of the solution to the failures of markets and states,but part of the problem of parochial populism or traditional fundamentalism.Many holding this view have long since rejected any dogmatic adherence to either pole of the planning versus markets opposition.But these an-chors still moor the ship of good government asfirmly as ever,debate now centering on the optimal location along the resulting continuum.

Those advocating social capital,or as we would prefer,community governance, as an important aspect of policy-making and institution-building have come to be dissatisfied with this view,doubting(with Kenneth Arrow)that states or markets, in any combination,can be so perfected as to make norms redundant,and believing that the substantial drawbacks of this third form of governance can be attenuated by adequate social policy.Many have also pointed to cases where efforts to perfect the market or assure the success of state interventions have destroyed imperfect but nonetheless valuable community-based systems of governance,suggesting that policy paradigms confined to states and markets may be counterproductive.

Unlike the utopian capitalism of textbook neoclassical economics and the utopian statism of its subbranch called welfare economics,which for the pastfifty years has imagined that governments have both the information and the inclination to offset market failures,there can be no blueprint for ideal community governance.As Elinor Ostrom(1990),James Scott(1998)and otherfield researchers have stressed, communities solve problems in a bewildering variety of ways with hundreds of differing membership rules,de facto property rights,and decision=making proce-dures.But the above cases may suggest some of the elements that are frequently found in well-governing communities and which might form part of a public policy aimed at enhancing the desirable aspects of community governance.

Thefirst,strongly supported by our experimental evidence,is that membersSocial Capital and Community Governance16 of the community should own the fruits of their success or failure in solving the collective problems they face.The Japanesefishermen,skippers and crew alike, own shares in the output of their coop and hence directly benefit from its success in a way that employees onfixed wages would not.Among the Chicago residents, communities in which home ownership is common exhibit much higher levels of “collective efficacy”even after controlling for a large number of demographic and economic variables.The most likely explanation is that home owners benefit fully from their neighborhood improvement interventions,not only from the improved quality of life but from the enhanced value of their homes.This interpretation is consistent with the fact that Sidney Verba and his collaborators(1995)found that controlling for a large number of demographic and other variables,U.S.home owners are more likely to participate in local but not national politics,and Edward Glaeser and Denise Depasquale(1999)found in a sample of German individuals that changes in home ownership predict changes in levels of civic participation. Finally,the plywood worker-owners’success would be inexplicable were it not for the fact that as residual claimants on the income stream of the coop,each own the results of the others efforts.As these examples suggest,in order to own the success of one’s efforts,community members must generally own the assets with which they work,or whose value is affected by what the community does.

Second,the cases above and hundreds like them suggest that well-working communities require a legal and governmental environment favorable to their func-tioning.The Chicago residents’success in reducing crime could hardly have been realized had the police not been on call.The Japanesefishing coops numbering more than a thousand work within national and prefectural environmental and other regulations which they are free to complement by locally made rules,but not to override.A comparison of Taiwanese and South Indian farmer-managed irrigation organizations shows that the greater success of the former is due to the effective intervention of national governments in providing a favorable legal environment and handling cases in which the informal sanctions of the community would not be adequate(Lam1996,Wade1988)Similar community-governmental synergy is found in Tendler’s study of the delivery of health care(1997)and Ostrom’s account of urban infrastructure(1996),both in Brazil.The fact that governmental interven-tion has sometimes destroyed community governance capacities does not support a recommendation of laissez faire.

The face-to-face local interactions of community are thus not a substitute for effective government but rather a complement.Neglect of this point no doubt ex-plains some of the popularity of the social capital concept.A Gallup Poll recently asked a large national sample of Americans“Which one of the following groups do you think has the greatest responsibility for helping the poor:churches,private charities,the government,the families and relatives of poor people,the poor them-Social Capital and Community Governance17 selves,or someone else?”They also asked if inequalities in income and wealth were “acceptable”or“a problem that needs to befixed.”While the sample was evenly split between the government on the one hand and all of the non-governmental re-sponses on the other,those unconcerned about the level of inequality were almost three times as likely to support the private approach than the government solution.3 Those favoring the social capital option in this case were seemingly more motivated by the fact that it would shrink government than by the hope that it would reduce inequality.

Thus both a legal and governmental environment that complements the distinc-tive governance abilities of communities and a distribution of property rights that makes members the beneficiaries of community success are key aspects of policies to foster community problem-solving.Developing an institutional structure such that states,markets and communities are mutually enhancing is a challenging task, however.For example,where property rights are ill-defined and informal con-tractual enforcement is essential to mutually beneficial exchange,more precisely defined property rights may reduce the multifaceted and repeated nature of interper-sonal contact on which community governance is based(Bowles and Gintis1998). Similarly,there is considerable evidence that attempts to induce higher levels of work effort,compliance to norms,or environmental conservation by mobilizing self-interested motives through the use offines and sanctions may undermine reci-procity and other social motives(Fehr and Gächter2000,Bewley1995,Gneezy and Rustichini2000,Cardenas,Stranlund and Willis2000),as well as other sources cited in Bowles(1998).

A third element in the community/good governance package:active advocacy of the conventional liberal ethics of equal treatment and enforcement of conventional anti-discrimination policies.That it is not unrealistic to hope that communities can govern effectively without repugnant behaviors favoring“us”against“them”is suggested by the many examples of well-working communities that do not exhibit the ugly parochial and divisive potential of this form of governance,including all of those above.

Other ways of empowering communities can be imagined,but some should be resisted on grounds that they heighten the difficult tradeoffs between good gover-nance and parochialism mentioned above.For example,Alesina and La Ferrara (1999)found that among U.S.localities,participation in church,local service and political groups as well as other community organizations is substantially higher where income is more equally distributed,even when a host of other possible influ-3Christina Fong,personal communication(1999)of her analysis of data from the Gallop Poll Social Audit Survey“Haves and Have-Nots:Perceptions of Fairness and Opportunity,”a randomly selected national sample of5001adults between April23and May31,1998.Social Capital and Community Governance18 ence are controlled.Theirfinding suggests that policies to increase income equality would enhance community governance.But they also found that racially and eth-nically diverse localities,measured by the probability that two randomly selected members of the population would be of different racial or ethnic groups,had sig-nificantly lower levels of participation.One may hope that pro-community public policy would not seek to increase racial and ethnic homogeneity of groups for this reason.

But simply resisting government policies which homogenize is not sufficient. If Alesina and La Ferrara’s results,and others like them,suggest that successful communities are likely to be relatively homogeneous,then a heavy reliance on community governance,in the absence of adequate counteracting policies,could promote higher levels of local homogeneity simply because the success of groups and their likely longevity will vary with how homogeneous they are.Thus a com-petitive economy in which worker-owned cooperatives are common is likely to exhibit more homogeneous workplaces than one made up of conventionalfirms. The combination of within-group homogeneity and between-group competition, while effectively promoting some desirable forms of governance,seems a recipe for hostile“us versus them”sentiments.Dilemmas such as this are not likely to disappear.

7Economic Evolution and the Future of Community Gover-nance

The age of commerce and the dawn of democracy were widely thought to mark the eclipse of community.Writers of all persuasions believed that markets,the state, or simply‘modernization,’would extinguish the values that throughout history had sustained forms of governance based on intimate and ascriptive relationships. According to the romantic conservative Edmund Burke(1955[1790])…the age of chivalry is gone.That of Sophisters,economists,and

calculators has succeeded.…Nothing is left which engages the affection

on the part of the commonwealth…so as to create in us love,veneration,

admiration or attachment.

The liberal Alexis de Tocqueville(1958)echoes Burke’s fears in this comment on democratic culture in America during the1830’s:

Each[person]…is a stranger to the fate of all the rest…his children and

his private friends constitute to him the whole of mankind;as for the

rest of his fellow citizens,he is close to them but he sees them not…he

Social Capital and Community Governance19 touches them but he feels them not;he exists but in himself and for

himself alone…

For the socialists Marx and Engels(1972[1848])

The bourgeoisie…has put an end to all feudal,patriarchal,idyllic re-

lations.It has pitilessly torn asunder the motley feudal ties that bound

man to his“natural superiors,”and has left remaining no other nexus

between man and man than naked self-interest…[I]n place of the num-

berless indefeasible chartered freedoms,it has set up that single,un-

conscionable freedom—free trade.(p.475)

Many who predicted the demise of community based their argument on the notion that communities owe their existence to a distinct set of pre-modern‘val-ues’that were bound to be extinguished by economic and political competition in markets and democratic states,or as Marx put it by“the icy waters of egotistical calculation.”Modern writers as well have stressed that the parochialism on which communities thrive require cultural commitments that are antithetical to modern social institutions.Talcott Parsons’sociological system,to mention one prominent example,consistently attributes‘particularistic’values to more primitive levels of civilization,and‘universalistic’values to the more advanced.

Fred Hirsch refers to the waning of precapitalist moral codes in similar vein: This legacy has diminished with time and with the corrosive contact of

the active capitalist values.As individual behavior has been increas-

ingly directed to individual advantage,habits and instincts based on

communal attitudes and objectives have lost out.Hirsch(1976):117–

118.

We do not doubt that markets and democratic states represent cultural envi-ronments in which some valuesflourish and others wither.Indeed,the dismay concerning their effects,expressed so long ago by Burke,Marx and de Tocqueville, may have been prescient.But the basis for the rise,fall,and transformation of communities,if we are correct,is to be sought not in the survival of vestigial values of an earlier age,but in the capacity of communities,like that of markets and states, to provide successful solutions to assist in solving contemporary problems of social coordination.

Far from being an anachronism,community governance appears likely to as-sume more rather than less importance in the future.The reason is that the types of problems that communities solve,and which resist governmental and market solu-tions,arise when individuals interact in ways that cannot be regulated by complete contracts or by externalfiat due to the complexity of the interactions or the private orSocial Capital and Community Governance20 unverifiable nature of the information concerning the relevant transactions.These interactions arise increasingly in modern economies,as information intensive team production replaces assembly lines and other technologies more readily handled by contract orfiat and as difficult to measure services usurp the preeminent role, as both outputs and inputs,once played by measurable quantities like kilowatts of power and tons of steel.In an economy increasingly based on qualities rather than quantities,the superior governance capabilities of communities are likely to be manifested in increasing reliance on the kinds of multilateral monitoring and risksharing exemplified above.The model of the Japanesefirm as an information sharing clan has already assumed importance for this reason(Aoki1988,Ouchi 1980).

But the capacity of communities to solve problems may be impeded by hier-archical division and economic inequality among its members.Many observers believe,for example,that the limited inequality between managers and workers in the Japanesefirm is a key contributor to its success.Pranab Bardhan(1999)and Jeff Dayton Johnson(1998)have found that farmer members of irrigation organiza-tions in Tamil Nadu,India and Guanajuato,Mexico are more likely to cooperate in making efficient use water if status and class inequalities among them are limited. These results may reflect the same behavioral regularities underlying experimen-tal results showing that cooperation in two-person non-repeated prisoners dilemma games declines dramatically when the degree of conflict of interest implicit in the payoff matrix increases(Axelrod1970,Rapoport and Chammah1965).

If we are right that communities work well where the tasks are qualitative and hard to capture in explicit contracts,but the conflicts of interest among the members are limited,it seems highly likely that extremely unequal societies will be competitively disadvantaged in the future because their structures of privilege and material reward limit the capacity of community governance to facilitate the qualitative interactions that underpin the modern economy.

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