Emergence of Endogenous Legal Institutions: The Rural Charters in Northern Italy
Common-pool resources create a well known social dilemma, and to solve the problem the recent literature in economics has focused on how repeated interaction can promote informal cooperation without the need for formal legal or political institutions. This paper examines a particular example of a common resource: common property in alpine communities of Northern Italy between the 13th and the 19th century. There, rather than relying on repeated interaction alone, users created formal mechanisms that regulated behavior and access to the common property via quotas and time restrictions. Because the formal institutions existed side by side with the sort of repeated interaction that would bread informal cooperation, there was a paradoxical redundancy of institutions. On one hand, formal regulations were probably the best way to limit the overuse of the commons. We consider the tradeoff between developing formal regulations versus relying on informal cooperation. Under certain conditions, the cost of building formal institutions is repaid by a large gain in efficiency. On the other hand, the users themselves had to create and administer the formal institutions, and since the benefits of formal regulations are a public good, each individual has an incentive to free ride. The collective action problem of providing regulatory services was surmounted thanks to the repeated interaction among users. The paradox is thus resolved.
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