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13.2 Community Governance

Communities are part of good governance because they address cer-
tain problems that cannot be handled by individuals, by market ex-
change, or by state regulation. In some of Chicago™s neighborhoods
studied by Robert Sampson Steven Raudenbush, and Felton Earls
(1997) for example, residents speak sternly to youngsters skipping
school, creating a disturbance, or decorating walls with graf¬ti. Resi-
dents are also willing to intervene to maintain neighborhood amenities
such as a local ¬rehouse threatened with budget cuts. These are all
examples of what the authors term ˜˜collective ef¬cacy.™™ In other neigh-
borhoods residents adopt a more hands-off approach.
Sampson, Raudenbush and Earls found considerable variation in the
neighborhood levels of collective ef¬cacy”with examples of rich, poor,
black, and white neighborhoods exhibiting both high and low levels.
Remarkably, ethnic heterogeneity was considerably less important in
predicting low collective ef¬cacy than were measures of economic dis-
advantage, low rates of home ownership, and other indicators of resi-
dential instability. Where neighbors express a high level of collective
ef¬cacy, violent crime is markedly lower, controlling for a wide range
Social Capital, Moral Sentiments, and Community Governance 383



of community and individual characteristics (including past crime
rates). Chicago™s neighborhoods illustrate the informal enforcement of
community norms.
The Toyama Bay ¬shing cooperatives in Japan studied by Erika Seki
and Jean-Philippe Platteau (Platteau and Seki [2001]) illustrate another
aspect of community problem solving. Faced with variable catches, as
well as the high level and changing nature of skills required, some ¬sh-
ermen have elected to share income, information, and training. One
co-op which has been highly successful since its formation thirty-¬ve
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 information 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 co-op™s income-pooling and cost-pooling activities
allow its boats to ¬sh in much riskier and higher yield locations, and
the skill- and information-sharing raises pro¬ts and reduces produc-
tivity differences among the boats. Fishing, off-loading the catch, and
marketing by individual boats are synchronized to increase the trans-
parency of the sharing process and make opportunistic cheating on the
agreement easy to detect.
The plywood workers who owned their ¬rms in Oregon and Wash-
ington bene¬ted from both the peer-monitoring of the Chicago neigh-
bors and the risk-pooling of the ¬shermen (Craig and Pencavel 1995).
They elected their managers and required of their members ownership
of a share of the ¬rm as a condition of employment, and employment
in the ¬rm as a condition of ownership. Before the industry moved to
the southeastern United States, these co-ops had successfully competed
with conventionally organized ¬rms in the industry (both union and
nonunion) for two generations. Their success was largely attributable
to high levels of work commitment and savings on managerial moni-
toring of workers (when one ¬rm converted to cooperative ownership,
the supervisory staff was cut by three-quarters). The econometric anal-
ysis of Ben Craig and John Pencavel (1995) indicates that total factor
productivity (output per unit of labor and capital combined) is signi¬-
cantly higher than in their conventional counterparts. When faced with
cyclical downturns in the demand for plywood, the co-ops, unlike their
competitors, do not ¬re or layoff workers, but rather elect to take cuts
in either wages or hours, thus pooling the cyclical risk among all mem-
bers rather than imposing it on a few (see also Pencavel [2001], and
384 Bowles and Gintis



for other examples Hansen [1997], Ghemawat [1995], and Knez and
Simester [2001]).
As these examples suggest, communities solve problems that might
otherwise appear to be classic market failures or state failures: namely,
insuf¬cient provision of local public goods such as neighborhood
amenities, the absence of insurance and other risk-sharing opportuni-
ties even when these would be mutually bene¬cial, 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 the ¬shermen, commu-
nity behavioral norms in Chicago) and to make use of ef¬cient insur-
ance arrangements that are not plagued by the usual problems of
moral hazard and adverse selection (the ¬shermen and the plywood
workers). This insider information is most frequently used in multilat-
eral rather than centralized ways”taking the form of a raised eye-
brow, a kind word, an admonishment, a bit of 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 gover-
nance where market contracts and government ¬ats fail because the
necessary information to design and enforce bene¬cial exchanges and
directives cannot effectively be used by judges, government of¬cials,
and other outsiders. This is particularly the case where ongoing rela-
tionships among community members support trust, mutual con-
cern, 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 Ar-
row and Gerard Debreu provided the ¬rst complete proof of Adam
Smith™s conjecture two centuries earlier on the ef¬ciency of invisible
hand allocations. But the axioms required by the Fundamental Theo-
rem of Welfare Economics were so stringent that Arrow stressed the
importance of what would now be called social capital in coping with
its failure:

In the absence of trust . . . opportunities for mutually bene¬cial cooperation
would have to be foregone . . . norms of social behavior, including ethical and
Social Capital, Moral Sentiments, and Community Governance 385


moral codes [may be] . . . reactions of society to compensate for market failures.
(Arrow 1971, 22)

Communities are one of the ways these norms are sustained (Bowles
and Gintis 1998, 1999).

13.3 Communities and Incentives

The task of comparative institutional analysis today, having left behind
the plan versus 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 related ¬elds
now allow economists to say quite a bit about this. Markets are attrac-
tive 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. More-
over, where residual claimancy and control rights can be closely
aligned, market competition provides a decentralized and dif¬cult to
corrupt disciplining mechanism that punishes the inept and rewards
high performers.
Like markets, the state is relatively well-suited for handling particu-
lar 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, the state works
well in cases where an economic process will be effective only if partic-
ipating 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 so-
cial 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, employ-
ers, banks, and other large formal organizations to apply rewards and
punishments to members according to their conformity with or devia-
tion from social norms. An effective community monitors the behav-
ior of its members, rendering them accountable for their actions. The
presence of a signi¬cant fraction of strong reciprocators heightens the
value of such dispersed information and opportunities for intrinsically
motivated cooperation and punishment of antisocial behavior. In con-
trast with states and markets, communities more effectively foster and
386 Bowles and Gintis



utilize the incentives that people have traditionally deployed to regu-
late 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
governance structures. First, the probability that members of a commu-
nity who interact today will interact in the future is high, and thus
there is a strong incentive to act in socially bene¬cial ways in the
present to avoid retaliation in the future. Second, the frequency of in-
teraction among community members lowers the cost and raises the
bene¬ts associated with discovering more about the characteristics, re-
cent behavior, and likely future actions of other members. The more
easily acquired and widely dispersed this information, the more com-
munity members will have an incentive to act in ways that result in
collectively bene¬cial outcomes. Third, communities overcome free-
rider problems by its members directly punishing ˜˜antisocial™™ actions
of others. Monitoring and punishment by peers in work teams, credit
associations, partnerships, local commons situations, and residential
neighborhoods is often an effective means of attenuating incentive
problems that arise where individual actions affecting the well-being
of others are not subject to enforceable contracts (Whyte 1955; Homans
1961; Ostrom 1990; Tilly 1981; Hossain 1988; Dong and Dow 1993;
Sampson, Raudenbush, and Earls 1997).
To the extent that economists have sought to understand how com-
munities work, they have treated individuals as self-interested and
considered models in which self-interested agents would cooperate”
even in interactions that at ¬rst glance appear to have defection as a
dominant strategy. We have explained elsewhere why we ¬nd these
explanations inadequate (Gintis 2000; Bowles 2004). By contrast, many
behavioral scientists outside of economics have sought to explain
communities by relations of altruism, affection, and other non“self-
regarding motives. 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. We stress non“self-interested
motives because we believe explaining how communities enforce
norms through mutual monitoring requires going beyond this tradi-
tional model of the individual actor. The treatment of social penalties
by Besley and Coate (1995) and of peer pressure by Kandel and Lazear
(1992) re¬‚ect a similar dissatisfaction with the conventional behavioral
model. Communities are often capable of enforcing norms, we suggest,
Social Capital, Moral Sentiments, and Community Governance 387



because a considerable fraction of members are strong reciprocators who
are willing to engage in the costly punishment of shirkers without a
reasonable expectation of being personally repaid for their efforts (see
chapter 1 and part II).

13.4 Community 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 mem-
bers often limits their capacity to exploit gains from trade on a wider
basis. Moreover, the tendency for communities to be relatively homo-
geneous may make it impossible to reap the bene¬ts 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 Japa-
nese co-op ¬shermen exploited economies of scale unattainable by less
cooperative groups and reaped substantial bene¬ts from the diversity
of talents among the membership. Similarly cooperation in the local
business networks in what is called ˜˜the third Italy™™ (along with
their associated local governments) allows otherwise unviably small
¬rms to bene¬t from economies of scale in marketing, research, and
training”allowing their survival in competition with corporate giants.
But compared to bureaucracies and markets, which specialize in deal-
ing with strangers, the limited scope of communities often imposes in-
escapable costs.
A second ˜˜community failure™™ is less obvious. Where group mem-
bership is the result of individual choices rather than group decisions,
the composition of groups is likely to be more culturally and demo-
graphically homogeneous than any of the members would like, there-
by depriving people of valued forms of diversity. To envision this
scenario, imagine that the populations of a large number of residential
communities are made up of just two types of people easily identi¬ed
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 neighbor-
hood tipping. Integrated communities would make everyone better off,
but they will prove unsustainable if individuals are free to move.
388 Bowles and Gintis



Young (1998) and Bowles (2003) provide models demonstrating this
result.
Economists use the terms ˜˜market failures™™ and ˜˜state failures™™ to
point to the allocative inef¬ciencies entailed by these governance struc-
tures, and so far our discussion of these along with community failures
has conformed to the canon. But communities often fail in other, some-
times more egregious ways. Most individuals seek membership in a
group of familiar associates and feel isolated without it. The baggage
of belonging, however, often includes poor treatment of those who do
not. The problem is exacerbated by the group homogeneity resulting
from the neighborhood tipping community failure described in the
previous paragraph. When insider-outsider distinctions are made on
divisive and morally repugnant bases such as race, religion, national-
ity, 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 be-
comes 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 ( Jung 1998). Even more
striking is Dov Cohen™s (1998) study of differences in the relationship
between violence and community stability indifferent U.S. regions.
With Richard Nisbett (1996), Cohen has described a ˜˜culture of honor™™
that often turns public insults and arguments into deadly confronta-
tions among white males in the South and West, but not in the North.
Cohen™s research con¬rms the ¬nding that in the North, homicides
stemming from arguments are less frequent in areas of higher residen-
tial stability, measured by the fractions of people living in the same
house and people living in the same county over a ¬ve-year period.
But this relationship is inverted in the South and West, as residential
stability is positively and signi¬cantly related to the frequency of these
homicides where the culture of honor is strong.

13.5 Enhancing Community Governance

Many adherents of the liberal philosophical tradition”whether con-
servative advocates of laissez faire or their social democratic and liberal
Social Capital, Moral Sentiments, and Community Governance 389



socialist critics”have 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 fundamental-
ism. Many holding this view have long since rejected any dogmatic ad-
herence to either pole of the planning versus markets opposition. But
these conceptual anchors still moor the ship of good government as
¬rmly as ever, and debate now centers on ¬nding the optimal location
along the resulting continuum.
Those advocating social capital, or as we would prefer, community
governance, as an important aspect of policymaking and institution-
building have come to be dissatis¬ed with this view. They doubt (with
Kenneth Arrow) that states or markets, in any combination, can be so
perfected as to make norms redundant, and they believe that the sub-
stantial 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 con¬ned to
states and markets may be counterproductive.
Unlike the utopian capitalism of textbook neoclassical economics
and the utopian statism of its sub-branch called welfare economics
(which during the 20th century 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; volume, chapter 9), James Scott (1998), and other ¬eld research-
ers have stressed, communities solve problems in a bewildering variety
of ways with hundreds of differing membership rules, de facto property
rights, and decision-making procedures. But the cases described in this
chapter 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 gover-
nance.
The ¬rst element, strongly supported by experimental evidence,
is that members of the community should own the fruits of their suc-
cess or failure in solving the collective problems they face. The Japa-
nese ¬shermen, skippers and crew alike, own shares in the output of
their co-op and hence directly bene¬t from its success in a way that
employees on ¬xed wages would not. Among the Chicago residents,
390 Bowles and Gintis



communities in which home ownership is common exhibit much
higher levels of ˜˜collective ef¬cacy,™™ even after controlling for a large
number of demographic and economic variables. The most likely ex-
planation is that home owners bene¬t fully from their neighborhood
improvement interventions”not only from the improved quality of
life, but from the enhanced value of their homes as well. This interpre-
tation is consistent with the fact that Sidney Verba and his collabora-
tors (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 with Edward Glaeser and Denise
Depasquale™s (1999) ¬ndings in a sample of German individuals that
changes in home ownership predict changes in levels of civic participa-
tion. Finally, the plywood worker-owners™ success would be inexplica-
ble were it not for the fact that as residual claimants on the income
stream of the co-op, each individual owns 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, as we have seen in the public goods with punishment
experiments, the unraveling of cooperation that often af¬‚icts com-
munities can be averted if opportunities for mutual monitoring and
punishment of noncooperators are built into the structure of social
interactions. Policies to increase the visibility of the actions of peers
in communities, along with policies to enhance the effectiveness of
forms of multilateral sanctioning of shirkers, may thus contribute to co-
operative solutions to problems, even if a majority of members are self-
interested. Huntergatherer bands that share food often practice the
custom of eating in public, an effect of which is to make violations of
the sharing rule evident to all. The Toyama Bay ¬shers™ practice of off-
loading their catch at the same time likewise contributes to transpar-
ency in implementing their sharing rule.
An important feature of models in which cooperation in sizable
groups is sustained by the punishment of shirkers is that multiple
equilibria typically exist. When cooperation is common, the costs in-
curred by civic-minded punishers is small, and they can easily persist
in a population. When cooperation is uncommon, those who punish
shirkers will incur heavy costs and will likely be eliminated by any
plausible evolutionary process (this volume, chapter 7). This suggests
that a heterogeneous population with some civic-minded members
Social Capital, Moral Sentiments, and Community Governance 391



(ready to punish those who violate norms) and some self-interested
members may exhibit high or low levels of cooperation depending not
on the distribution of types in the population, but rather on the recent
history of the group.
There is a third desideratum for enhancing community governance.
The cases described in this chapter and hundreds like them suggest
that well-working communities require a legal and governmental envi-
ronment favorable to their functioning. The Chicago residents™ success
in reducing crime could hardly have been realized had the police not
been on call. The Japanese ¬shing co-ops numbering more than a thou-
sand 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 suc-
cess of the former is due to the effective intervention of national gov-
ernments in providing a favorable legal environment and handling
cases in which the informal sanctions of the community would not be
adequate (Lam 1996; Wade 1988) 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 of
which focus on Brazil. The fact that governmental intervention has
sometimes destroyed community governance capacities does not sup-
port a recommendation of laissez faire.
The face-to-face local interactions of community are thus not a sub-
stitute for effective government but rather a complement. Neglect of
this point no doubt explains some of the popularity of the social capital
concept. A Gallup Poll recently asked a large national sample of Amer-
icans ˜˜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-
selves, or someone else?™™ The survey also asked if inequalities in in-
come and wealth were ˜˜acceptable™™ or ˜˜a problem that needs to be
¬xed.™™ While the sample was evenly split on the ¬rst question between
the government on the one hand and all of the non-governmental
responses on the other, those unconcerned about the level of inequality
in the second question were almost three times as likely to support the
private approach than the government solution (see this volume, chap-
ter 10). Those favoring the social capital option in this case were seem-
ingly more motivated by the fact that it would shrink government than
by the hope that it would reduce inequality.
392 Bowles and Gintis



Thus, both a legal and governmental environment that complements
the distinctive governance abilities of communities and a distribution
of property rights that makes members the bene¬ciaries of commu-
nity 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, how-
ever. For example, where property rights are ill-de¬ned (and informal
contractual enforcement is essential to mutually bene¬cial exchange),
more precisely de¬ned property rights may reduce the multifaceted
and repeated nature of interpersonal contact on which community
governance is based (Bowles and Gintis 1998). Similarly, there is
considerable evidence that efforts to induce higher levels of work
effort, compliance to norms, or environmental conservation by mobi-
lizing self-interested motives through the use of ¬nes and sanctions
may undermine reciprocity and other social motives (see this volume,
chapters 1 and 9; as well as sources cited in Bowles 1998 and Bowles
2004).
A fourth 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 with-
out 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 dif¬cult tradeoffs
between good governance and parochialism mentioned in this chapter.
For example, Alesina and La Ferrara (2000) found that among United
States 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 in¬‚uences are controlled. Their ¬ndings suggest
that policies to increase income equality would enhance community
governance. But they also found that racially and ethnically diverse
localities, measured by the probability that two randomly selected
members of the population would be of different racial or ethnic
groups, had signi¬cantly 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.
Social Capital, Moral Sentiments, and Community Governance 393



But simply resisting government policies that homogenize is not
suf¬cient. If Alesina and La Ferrara™s results (and others like them)
suggest that successful communities are likely to be relatively homoge-
neous, then a heavy reliance on community governance, in the ab-
sence 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
competitive economy in which worker-owned cooperatives are com-
mon is likely to exhibit more homogeneous workplaces than one made
up of conventional ¬rms. The combination of within-group homoge-
neity 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 one are not likely to
disappear.

13.6 Economic Evolution and the Future of Community Governance

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 romanticist 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[1832]) echoes Burke™s fears in
this comment on democratic culture in America during the 1830s:

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 touches them
but he feels them not; he exists but in himself and for himself alone . . .

For the socialists Karl Marx and Friedrich Engels (1972[1848], 475)

The bourgeoisie . . . has put an end to all feudal, patriarchal, idyllic relations.
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 numberless indefeasible
394 Bowles and Gintis


chartered freedoms, it has set up that single, unconscionable freedom”free
trade.

Many who predicted the demise of community based their argu-
ment on the notion that communities owe their existence to a distinct
set of pre-modern ˜˜values™™ that were bound to be extinguished by eco-
nomic and political competition in markets and democratic states, or
as Marx put it, by ˜˜the icy waters of egotistical calculation.™™ Modern
writers have also stressed that the parochialism on which communities
thrive requires 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 refered 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 increasingly 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 cul-
tural environments in which some values ¬‚ourish 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 ear-
lier 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 assume 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 solutions, arise when individuals in-
teract in ways that cannot be regulated by complete contracts or by ex-
ternal ¬at due to the complexity of the interactions or the private or
unveri¬able nature of the information concerning the relevant transac-
tions. These interactions arise increasingly in modern economies, as in-
formation intensive team production replaces assembly lines and other
technologies more readily handled by contract or ¬at and as dif¬cult
to measure services usurp the preeminent role, as both outputs and
Social Capital, Moral Sentiments, and Community Governance 395



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 multi-
lateral monitoring and risksharing exempli¬ed in this chapter.
But the capacity of communities to solve problems may be impeded
by hierarchical division and economic inequality among its members.
Many observers believe, for example, that the limited inequality be-
tween managers and workers in the standard Japanese ¬rm is a key
contributor to information sharing between management and produc-
tion workers (Aoki 1988). Dayton-Johnson and Bardhan (2002) have
found that farmer members of irrigation organizations in Tamil Nadu,
India and Guanajuato, Mexico are more likely to cooperate in making
ef¬cient use of water if status and class inequalities among them are
limited. We survey other evidence as well as the theory underlying
these comments in Baland, Bardhan, and Bowles (2002) and Bardhan,
Bowles, and Gintis (2000). These results may re¬‚ect the same behav-
ioral regularities underlying experimental results showing that cooper-
ation in two-person non-repeated Prisoner™s Dilemma games declines
dramatically when the degree of con¬‚ict of interest implicit in the pay-
off matrix increases (Axelrod 1970; Rapoport and Chammah 1965).
If we are right that communities work well relative to markets and
states where the tasks are qualitative and hard to capture in explicit
contracts, and where the con¬‚icts of interest among the members are
limited, it seems likely that extremely unequal societies will be compet-
itively disadvantaged in the future because their structures of privilege
and material reward limit the capacity of community governance to fa-
cilitate the qualitative interactions that underpin the modern economy.

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Contributors




Professor of Economics, Yale University
Truman Bewley,
Rebecca Bliege Bird, Assistant Professor, Department of Anthropo-
logical Sciences, Stanford University
Samuel Bowles, Research Professor and Director of the Behavioral
Science Program, Santa Fe Institute and Professor of Economics, Uni-
versity of Siena
Professor of Anthropology, University of California“
Robert Boyd,
Los Angeles
Armin Falk, Institute for Empirical Research in Economics, Univer-
¨
sity of Zurich
Ernst Fehr, head of the Institute for Empirical Research in Economics,
¨
University of Zurich
Institute for Empirical Research in Economics, Uni-
Urs Fischbacher,
¨
versity of Zurich
Christina M. Fong, Research Scientist, Department of Social and De-
cision Sciences, Carnegie-Mellon University
Herbert Gintis, Emeritus Professor of Economics, University of Mas-
sachusetts and External Faculty, Santa Fe Institute
Michael Gurven, Assistant Professor of Anthropology, University of
California at Santa Barbara
Professor of Law, Yale Law School
Dan M. Kahan,
Professor of Anthropology, University of New
Hillard Kaplan,
Mexico
Professor of Political Science, Indiana University
Elinor Ostrom,
400 Contributors



Peter J. Richerson, Professor of Environmental Science and Policy,
University of California at Davis
Rajiv Sethi, Associate Professor of Economics, Barnard College, Co-
lumbia University
Professor of Anthropology, University of California“Los
Joan Silk,
Angeles
Professor of Anthropology, University of Washington
Eric A. Smith,
Associate Professor of Economics, Indian Statistical
E. Somanathan,
Institute, Delhi
Index




Adverse selection, 313, 317, 384 Coalition, 48, 54, 70“72, 103, 119
Altruism, 7“11, 22, 24, 25, 33, 34, 43, 45, 48, Collective action, 32, 79, 98, 109, 127, 134,
50, 52, 60, 63, 69, 77, 79, 111“113, 125, 135, 142, 146, 147, 152, 157, 164, 183, 255,
128, 129, 146“148, 154, 155, 215, 229, 259, 262, 263, 270, 339“345, 347“352,
282, 326, 339, 344, 386 355, 357, 358, 361, 364, 366, 367, 380
Altruistic behavior, 5, 23, 34, 43, 45, 60 Collective good, 32, 116“142, 341, 342, 357,
Altruistic punishment, 9, 12, 20, 24, 145, 366
215“219, 222, 223, 226 Collusion, 164, 171
Anonymity, 11, 12, 15, 17, 26, 28, 184 Common pool resource, 31, 32, 230, 231,
Assortation/assortative interaction, 231, 243, 248
238“240, 242, 243, 248 Complete contracts, 394
Attitudinal survey, 285 Conditional cooperation, 154, 168, 253
Axelrod, Robert, 7, 8, 34, 43, 52, 64, 126, Conditional reciprocity, 116, 117, 119, 126,
144, 184, 186, 215, 226, 248, 367, 374, 395, 127, 129, 132, 136
396 Conformist transmission, 24
Consequentialist, 195, 197, 199, 200, 211“
Bargaining game, 210 213
Bounded rationality, 157 Cooperation among nonkin, 23, 53, 79,
Bowles, Samuel, 3, 9“11, 22, 24, 25, 32, 35, 215
37, 95, 118, 120“122, 135, 141, 143, 145, Costly signaling, 11, 31, 79, 80, 82, 85, 86,
168, 187, 188, 215, 217, 218, 227, 249, 253, 98, 107, 112, 115, 117, 118, 120, 122, 129,
271, 277, 298, 300, 367, 375, 379, 385, 386, 134, 135, 140, 143“145, 147
388, 392, 395, 396 Crowding out, 20, 134, 186, 260, 268, 270,
Boyd, Robert, 3, 9, 22, 24, 25, 30, 31, 35, 344, 346
37“39, 79, 80, 82, 95, 98, 107, 119, 122, Cultural evolution, 9, 30, 31, 218, 219, 226
126, 128, 129, 135, 137, 138, 144, 145, Cultural group selection, 9, 31, 141
147, 215, 217“219, 225, 227, 248, 249, Cultural norms, 27, 98
367, 375
Bravery, 137 Dawkins, Richard, 7, 8, 35, 123, 145
British Household Panel Study, 317 de Waal, Frans, 43, 49, 54, 57“61, 63“67,
Broadcast ef¬ciency, 123“125, 141 70, 73, 144
Byproduct mutualism, 77, 78 Decentralized sanctions, 233
Density-dependent competition, 217
Capitalism, 142, 380, 389 Deserving poor, 168, 169, 294, 297
Charity, 23, 127, 128, 146, 280, 284, 342, Distributional equity, 195, 202
367 Dictator game, 209, 253, 283, 284
Cheap talk, 174, 178 Dominance hierarchy, 44, 49, 107
402 Index


¨
Dominant strategy, 118, 166, 169, 180, 342, Gachter, Simon, 13“15, 17, 18, 20, 34, 36,
386 37, 157, 163, 166, 169, 170, 172, 174“176,
Double auction, 160“163 184, 185, 188, 189, 257, 271, 319, 321“
323, 331, 333, 334, 367, 369
Economic incentives, 152, 155, 174, 175, 264 Gains from cooperation, 97, 99, 102, 104,
Ef¬ciency wage, 163 105
Effort level, 13, 15, 161, 162, 174“178, 319“ Gallup Social Audit, 279, 285, 300
323 Game theory, 4, 193, 253, 255, 266, 385
Egalitarian redistribution, 32, 277 Gene-culture coevolution, 9, 23, 24
Enforcing cooperation, 134, 135 Gift exchange, 156, 157, 161“163, 174, 182,
Equity, 136, 137, 168, 197, 207, 279, 307, 184, 209, 309, 312, 320
308, 310, 313, 317 Gilens, Martin, 278, 279, 289, 293“296, 299,
Ethnographic data, 5, 29, 107, 116, 129, 136, 300
138, 215, 283 Gintis, Herbert, 3, 9“11, 22, 24, 25, 32, 35,
Evolution of cooperation, 47, 64, 72, 107, 37, 44, 67, 95, 108, 118, 120“122, 135,
144, 145, 219“223 141, 143, 145, 168, 187, 188, 209, 214, 215,
Evolutionary puzzle, 215 217, 218, 227, 248, 249, 270, 277, 298, 300,
Evolutionary stability, 24, 116, 121, 122, 367, 369, 375, 379, 385, 386, 392, 395,
128, 129, 135, 145, 216, 242, 248 396
Excess supply of labor, 161, 310, 319, 331 Glaeser, Edward, 5, 37, 279, 300, 381, 390,
Experimental games, 6, 26, 28, 209 396
Explicit contract, 32, 177, 178, 395 Gossip, 22, 86, 95, 99, 384
External incentives, 340 Grooming, 48, 52“55, 57, 64, 66“73, 140
Group extinction, 24, 31, 217, 219, 225
Fairness, 19, 27, 29, 63, 136, 137, 152, 153, Group selection, 8“11, 23, 31, 34, 79, 80, 85,
156, 158, 160, 172, 174, 176, 182“184, 105, 113, 115, 119, 122, 134, 137, 138, 145,
189, 193“195, 198, 200, 203, 204, 210, 215, 217, 219, 221“226
211, 259, 265, 297, 303, 307“309, 320,
326, 327, 329“331 Hamilton, William, 3, 7, 8, 34, 37, 43“45,
Falk, Armin, 10, 18, 36, 153, 154, 157, 160“ 52, 64, 68, 79, 109, 126, 137, 144, 146, 184,
162, 172, 173, 181, 182, 184, 186“189, 186, 215, 226, 248, 249
193, 197, 202“204, 206, 207, 209, 211, Hamilton™s Rule, 45, 48, 50, 84
214, 248, 249, 319“322, 324, 333, 334, Homo economicus, 3, 6, 193, 249, 282“284,
368, 375 379“381
Fehr, Ernst, 3, 10, 13“18, 20, 21, 34, 36, 37, Honest signaling, 80, 117, 119, 120, 122,
151, 153, 154, 156, 157, 159“163, 166, 131, 139, 140
169, 170, 172“179, 182“188, 190, 197, Horticulturists, 27
202“204, 210, 214, 248, 249, 257, 264, Human peak net production, 89
265, 271, 273, 304, 319“324, 331, 333“ Hunter-gatherers, 75“77, 88, 108“111, 126,
335, 367, 369, 375 146
Feldman, Marc, 9, 36, 370, 375 Hyper-fair offer, 28, 29
Fischbacher, Urs, 10, 18, 36, 151, 153, 154,
156, 157, 159, 160, 166, 169, 172, 173, 181, Implicit contract, 177, 178
182, 185“188, 193, 197, 202“204, 206, Incentive compatibility, 102, 258
207, 209, 211, 214, 248, 249, 324, 331, 333, Incentive contracts, 177
367“369, 375 Incentive effects, 279, 291
Food sharing, 11, 23, 48, 55“57, 66, 75“77, Inclusive ¬tness, 7, 43, 45
79, 80, 84, 86, 103, 107, 108, 111“113, Incomplete contracts, 176
126, 127, 144 Indirect reciprocity, 82, 107, 128, 129, 145“
Free-rider, 15, 26, 97, 98, 126, 134, 139, 164, 147
166, 169“173, 186, 215, 216, 225, 260, Inequity aversion, 152“155, 166, 185, 195,
293, 341“347 202“204, 210, 211
Index 403


Insiders, 163, 174, 296, 388 Ostrom, Elinor, 10, 15, 16, 20, 31, 38, 169,
Intentions, 6, 18, 19, 33, 79, 139, 168, 182, 171, 184, 189, 190, 248, 250, 253, 254, 257,
184, 194, 197“201, 206“208, 211, 212, 258, 260, 264, 266“269, 271“275, 368,
324, 329, 346, 365 377, 381, 386, 389, 391, 397
Inter-group con¬‚ict, 137 Outsiders, 163, 174, 296, 384, 388
Internalized norm, 15
Intrinsic motivation, 254, 259, 260, 263, Parochialism, 231, 238, 240, 242, 243, 248,
264, 267 392, 394
Involuntary unemployment, 163, 173 Pastoralist, 142
Irrigation association, 261, 262 Peer pressure, 169, 386
Performance incentives, 174“176, 264, 305
Joint ownership, 179, 180, 181 Piece rates, 307
Positive reciprocity, 155, 212, 213, 318, 362
Kindness, 22, 194“197, 199“202, 204“209, Price, George, 9, 38
211, 212 Price™s Equation, 9
Kinship, 43, 46, 47, 50, 52, 54, 63, 65, 69“71, Primate, 11, 44, 46“48, 51, 52, 59“61, 63“
84, 98“100, 105 65, 67, 72, 73
Principal-agent model, 176, 298
Labor market, 161, 173 Property rights, 152, 179, 182, 183, 363,
Laibson, David, 37, 396 379, 380, 382, 389, 392
Local commons, 230, 243 Prosocial norms, 27, 30
Loewenstein, George, 5, 38, 197, 214, 284, Public Agenda, 294, 295, 300
301 Public goods game, 15“18, 118, 169, 170,
Lump-sum transfer, 176 173, 186, 202“204, 209, 211
Punishing defectors, 37, 134, 135, 195, 204,
Material payoff, 165, 193, 195, 210, 242, 205, 211, 216, 219, 222“224, 226, 227,
253, 349 346
Maynard Smith, John, 8, 10, 38 Punishment condition, 18, 170
Median voter model, 277
Migration, 23, 80, 215, 219, 226 Rational behavior, 152, 259
Moonlighting game, 18, 19 Rational egoist, 253, 254, 259, 263, 265
Moral hazard, 174, 384 Real wage, 310, 14, 18, 24, 27, 30, 32, 129,
Moral sentiments, 32, 63, 98 143, 155, 164, 165, 169, 229, 230, 231, 233,
Morale, 32, 306“310, 312, 314, 316“318, 234, 235, 236, 237, 238, 239, 240, 241, 242,
324“331 243, 244, 245, 246, 248, 253, 254, 259, 265,
Multilevel selection, 9, 34, 45, 73, 113, 341, 342, 345, 346, 347, 348, 349, 353, 354,
138 357, 359, 364, 366, 385, 387
Mutualism, 58, 78, 82, 125, 126 Relatedness, 7, 26, 45, 48, 65, 79, 98
Relationship speci¬c investment, 179
Nash equilibrium, 120, 122, 185 Repeated game, 156, 171, 184
Natural selection, 30, 44, 79, 97, 117, 219, Repeated interaction, 8, 94, 118, 152, 153,
226 156, 157, 171, 215
Neoclassical economics, 3, 345, 389 Reproductive success, 46, 47, 94, 146, 147
NIMBY, 263, 352“355, 370, 376, 377 Resource regime, 268
No shirking theory, 312 Retaliation, 202“204, 211, 346, 347, 358,
Nominal wage, 32, 304, 305, 314, 316 386
Revenge, 23, 61, 71, 145
One-shot, 13, 25, 26, 63, 64, 125, 142, 152, Risk-neutrality, 175, 178
156“159, 161, 165, 172, 173, 177, 184, Rule-of-thumb behavior, 156
203, 215, 256, 264
Organizational citizenship, 326“329 Sanctioning behavior, 172, 248
Ostracism, 22, 86, 169, 171, 185, 362 Scrounging, 78, 107
404 Index


Self-interest, 3, 7, 11, 25, 30, 32, 33, 94, 95, Unconditional generosity, 116, 132, 137,
153, 156, 157, 160“162, 165, 171, 174, 141
176, 178, 180, 181, 183, 184, 230, 232, Unconditional sharing, 131, 133
243, 254, 257“259, 261, 270, 278, 279,
282, 285“291, 293, 299, 364, 366, 381, Wage differentials, 163
386, 391, 392, 393 Wage formation, 162
Self-interest hypothesis, 151, 152, 158, 165, Wage rigidity, 303, 304, 306, 310“313, 315“
169, 170, 173, 183 317, 320, 321, 331
Self-regarding, 6, 8, 10, 12“17, 19, 21, 22, Warfare, 31, 137, 138, 144“147, 171, 217,
25, 27, 32, 33, 230, 277, 282 396
Sharing norms/systems, 76, 78, 99, 102, Welfare recipient, 280, 284, 292, 295, 296
103 Welfare state, 167, 277, 279, 282, 293, 295,
Shirking, 175, 177, 186, 264, 315“317, 322, 296, 297
323, 339, 341, 345 Wilson, David Sloan, 45, 73, 79, 80, 113,
Signaling costs, 11, 117, 143 215, 227
Small-scale societies, 9, 22, 27, 75, 76, 96, Wilson, Edward, 7, 9, 38, 39
137, 218, 219 World Values Survey, 279
Smith, Adam, 3, 4, 39, 384
Sober, Eliot, 9, 39, 215, 227 Zahavi, Amos, 79, 113, 115, 116, 118, 140,
Social dilemma, 27, 165, 166, 169, 195, 253, 148
259
Social dominance, 29, 118, 138
Social policy/public policy, 4, 11, 31, 32,
167, 266, 267, 270, 339, 347, 389, 392
Social preferences, 151“153, 155, 157, 184
Spiteful/envious preferences, 154, 155,
184, 189, 214
Stake size, 156
Standing model, 128, 147, 293, 297
Strategic sanctions, 172, 173
Strong reciprocity, 8“12, 14, 17, 18, 20, 22“
25, 27, 30“32, 34, 44, 61, 63, 64, 115, 125,
134, 136, 151“156, 158, 161, 163, 164,
166, 168, 174, 176, 177, 179, 180“184,
194, 229“231, 238, 242, 243, 282, 283,
285, 293, 294, 341“344, 349, 350, 357,
362“366, 382
Structured populations, 242, 248

Tax evasion, 32, 261, 347, 349, 362
The Edda, 277, 300
Tolerated theft, 78“82, 86, 106, 107, 113, 126
Trait-group selection, 80, 81, 86
Trivers, Robert, 3, 7, 8, 39, 43, 52, 73, 76,
113, 126, 138, 148, 184, 190, 215, 227
Trust game, 21, 253, 263, 264

Ultimatum game, 11, 12, 22, 27“29, 156“
160, 162, 182, 184, 186, 194, 198, 201“
203, 209, 211, 253, 321
Unconditional altruism, 9, 45, 154, 155,
381

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