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The ‘make or buy’ decision in private environmental transactions

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Abstract

A theoretical framework combining the two branches of TCE, i.e., the governance branch (Williamson 2005) and the measurement branch (Barzel 2005) may explain the choice of the governance structure for private environmental transactions. Four case studies, i.e., the market for pure air in polluted cities, the contractual arrangement between La Esperanza and the Monteverde Conservation League, the case of the French mineral water bottler Vittel and the case of land ownership by land trusts are briefly developed in order to support the theoretical framework. Special attention is devoted to the presence (or not) of a 3-D (defined, defended and divestible) property rights system in interaction with the juridical system (civil law vs. common law) and its influence on the way environmental property rights are likely (or not) to be re-arranged. Lessons and policy implications are drawn in order to foster research on these challenging issues.

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Notes

  1. To avoid any confusion, we distinguish legal property rights from abilities to make choices, i.e., economic property rights. The legal property rights are the property rights that are recognized and enforced by the government. The economic property rights of an individual over an asset are the individual’s ability, in expected terms, to consume the good or the services of the asset directly or to consume it indirectly through exchange. Agents may capture economic property rights, even if legal property rights are absent, and such initiatives can be supported by other formal or informal institutions (Barzel 1989).

  2. In the real world, evolution and development of property rights are very complex. In many cases, government does not create property rights as a policy decision. The rights somehow develop through spontaneous evolution or other unauthorized processes, sometimes including coercive measures (Nelson, 1986).

  3. At common law, downstream parties hold the right not to be harmed without permission. Public nuisance law handles the collective harm problem. Private nuisance law handles the individual harm cases. Parties upstream that wish to use the environment in ways detrimental to those downstream can contract around the common law rule. In other words, common law established 3-D rights early on, especially for water pollution.

  4. Loi d’orientation agricole n 2006–11 du 5 janvier 2006 (art. 76).

  5. Measurement difficulty may arise both in terms of the sources and the consequences of pollution, similarly to asset specificity (see Bougherara et al. in press for more details). Husted (2004, p. 252) illustrates this difficulty of measurement when ‘a factory’s output is, in and of itself, not noxious; however, in combination with the by-products of other production processes, it can be toxic.’

  6. Arnason (1999) suggested a methodology to measure the quality of property rights that may be useful to extend our analysis.

  7. Even in the case of 3-D property rights, certain properties of environmental assets may increase transaction costs. For example, some environmental amenities may require contiguous acres and landowners may exploit spatial opportunism by holding out.

  8. A referee suggested the example of shopping malls and housing developments as they exist in the U.S. to illustrate the hierarchy governance structure. These are vertically integrated organizations that have decided to provide a range of services under a single hierarchy because doing so resolves certain resource conflicts. A shopping mall can take into account any spill-over effects from having a main store that attracts customers to other smaller ships, and reflect that in the rental rate. A housing development can provide parks, streets, limits on house types, etc., all things that in the past have resulted in conflicting claims over rights.

  9. This literature is mainly based on the externality conception of the problem.

  10. We do not mean that hierarchy has higher total transaction costs than hybrid forms under all circumstances. In some circumstances, hierarchy may constitute the most economizing transaction cost way to organize the transaction.

  11. This maybe untrue for point source pollution.

  12. On the difference between market-based instruments and free market environmentalism, see McGee and Block (1994), Cordato (1997) and Hill (1997).

  13. Nevertheless, the governmental contracting for environmental services differs from private contract, notably in the sense that they are frequently achieved under the threat of a stricter regulation.

  14. http://www.doorbell.net/tlr/87_93.htm.

  15. http://www.columbiatribune.com/2006/Jul/20060718Busi014.asp.

  16. The data for this case study comes mainly from the contract itself (Janzen 1999), Rojas and Aylward (2002), and personal investigations.

  17. Fondo Nacional de Financiamiento Forestal or National Forestry Financing Fund.

  18. For example, FONAFIFO set US$ 40/ha/year as the standard payment for a bundle of four environmental services: mitigation of greenhouse gas emissions, watershed protection, biodiversity protection, and natural scenic beauty.

  19. Vittel refers to the Vittel Company, regardless of its formal name. Vittel is one of the world’s top ten best-selling brands of waters and contributes highly to the reputation and financial results of Nestlé Waters. Key data of Nestlé Waters in 2004 includes: Sales: € 5.2 billion; Market share in value (estimated): 17%; Number of brands of bottled water: 77. (Source: Nestlé Waters: http://www.nestle-waters.com/en/).

  20. For example, the Vittel enforcement uses some scientific research procedures that have been adapted from their initial use (Chia and Raulet, 1994).

  21. In France, some mineral water companies (e.g., Plancoët) have purchased their whole catchment areas and manage them directly, making the risk of pollution less likely.

  22. The discussion is notably mainly based on the work of Parker (2004, 2005).

  23. This problem relates to asset specificity. Trusts contracting easements for the provision of trails and greenways will be more exposed to spatial holdups because of economies of scale across parcels for these amenities.

  24. Several criticisms regarding land trust arrangements can be found in Raymond and Fairfax (2002). In some cases, landowners unduly take advantage of tax benefits. They “have used inflated appraisals to take huge tax write-offs at the expense of taxpayers. Others have used easements to protect swamps and mountainsides that could never be developed, or golf courses and private lots that have little or no conservation value” (Anderson and Christensen 2005). These elements stress the importance of well-crafted policies with build-in flexibility allowing to take in consideration unanticipated effects.

  25. In this case, the optimal scale at which public authorities (e.g., local, regional, national and so forth) intervene is a crucial issue that deserves more attention.

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Acknowledgments

We are particularly indebted to Gary Libecap, Laura McCann and Bruce Yandle for their helpful comments and suggestions. We are also thankful to Christophe Déprés, Robert H. Nelson, Dominnic Parker, Luc Thiébaut, participants of the 42nd congress of the Association des Sciences Régionales De Langue Française (ASRDLF), Sfax, 4–6 September 2006 and participants of the 10th annual conference of the International Society of New Institutional Economics (ISNIE), Boulder, 22–24 September 2006 for their comments. The usual disclaimer applies.

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Authors and Affiliations

  1. INRA SAE2, Rennes, France

    Douadia Bougherara

  2. Montpellier Supagro, UMR 1135 LAMETA, Montpellier, France

    Gilles Grolleau

  3. INRA, UR 767 Ecodéveloppement, Avignon, France

    Naoufel Mzoughi

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  1. Douadia Bougherara
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  2. Gilles Grolleau
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Correspondence to Gilles Grolleau.

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Bougherara, D., Grolleau, G. & Mzoughi, N. The ‘make or buy’ decision in private environmental transactions. Eur J Law Econ 27, 79–99 (2009). https://doi.org/10.1007/s10657-008-9080-8

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