Anticommons, Tragedy of the

Definition

The tragedy of the anticommons is a type of coordination breakdown, in which a single resource has numerous owners, each of whom has the right to individually exclude others from its use but no effective privilege of using it independently. This coordination failure, i.e., the exercise of the veto power from any one of the owners will result in the underuse of the resource, frustrating what would be a socially desirable outcome.

The Concept of the Tragedy of the Anticommons

According to the definition by Heller (1998), an anticommons property is a scarce resource in which multiple owners have the right to individually exclude others from its use, and no one has an effective privilege of using it independently. The use of anticommons property requires these numerous right holders of a single resource to reach a consensus on the permission. The coordination breakdown of the owners, i.e., the exercise of the veto power from any one of the excluded right holders, will result in the underuse of the property, frustrate what would be a socially desirable outcome, and thus lead to the “tragedy of anticommons.” The “tragedy of the anticommons” can be considered as a mirror image of the older concept of tragedy of the commons described notably by Hardin (1968), where multiple individuals are endowed with the privilege to individually use a given resource but without a right or an effective way to monitor and constrain each other’s use, leading to the overuse of the resource. In terms of efficiency, the problem of the anticommons is based on a positive externality, while the problem of the commons is based on a negative externality.

The concept of the “tragedy of anticommons” is especially important for the transitional economies during the privatization process. One solution to the traditional tragedy of the commons is to fragment the common property into pieces and distribute them to different private owners. Private owners tend to avoid overuse because they can benefit directly from conserving the resources they control. Unfortunately, in the privatization process, too many separate owners of a single resource may be created, so that each one can block the others’ use of the resource as a whole. Meanwhile, the separate use of the part of the resource that each separate owner controls may be impossible or with little value. As a result, nobody can use the resource efficiently if cooperation fails, leading to the tragedy of anticommons. For example, suppose an acre of land is distributed to 100,000 individuals who each own one square foot. The land will never be used for anything as long as thousands of people have to agree on what to do.

The anticommons is a paradox. While private ownership usually increases the efficiency of the use of scare resources and the social wealth, too many private owners from the fragmentation of a single property right has the opposite effect: it stops efficient use of the resource as a whole, hinders future innovation based on existing numerous intellectual property rights hold by different owners, and may cost our lives (Heller 2008). Anticommons property appears when new property rights are being defined and allocated without mechanisms for resolving ownership disputes. While Heller devotes most of his attention to the underuse of commercial property in Moscow and other cities in the former Soviet Union, the concept of the anticommons has much wider implications in many other cases. Anticommons property can also emerge in developed markets wherever new property rights are being defined. This may occur when new technologies make possible uses of, for example, intellectual property and environmental rights, unanticipated by the previously existing legal mechanism.

Once anticommons property appears, it is difficult to remedy the situation either through markets or subsequent regulation. Care must be taken to avoid the accidental creation of anticommons property when new property rights are being defined by conveying core bundles of rights rather than multiple rights of exclusion.

Typical Examples of the Tragedy of Anticommons

Tragedy of Anticommons in the Transition from Marx to Markets in Moscow

A classical example of the tragedy of anticommons is proposed by Michael Heller in his famous article “The tragedy of the anticommons: Property in the transition from Marx to markets” published in Harvard Business Review, in which he examines a paradox in Moscow after the dissolution of the Soviet Union (Heller 1998). Storefronts remained empty even though the economy was growing and there was demand for consumer goods. In contrast, street kiosks in front of them filled with goods and customers. Why did the new merchants not come in the storefronts? One reason was that transition governments often failed to endow any individual with a bundle of rights that represents full ownership. Instead, fragmented rights were distributed to various stakeholders, including private or quasi-private enterprises, workers’ collectives, privatization agencies, and local, regional, and federal governments. The fragmentation of the property right on the storefronts leads to a tragedy of the anticommons, an underuse of the storefronts due to the allocation of multiple new owners with the rights to exclude others from its use. An owner benefits from keeping a storefront empty, by excluding others because exclusion preserves the value of the right, perhaps for later trade to property bundlers or perhaps for use in rent seeking. The right of exclusion is valuable precisely because others want to use the resource and will pay something to collect the right. Because multiple parties may hold the same right, almost any use of the storefront requires the agreement of multiple parties. Even if only one party opposes the use, that party may be able to block others from exercising their rights.

Moving a storefront from anticommons to private property ownership requires unifying fragmented property rights into a usable bundle. In other words, creating private property requires moving from too many owners, each exercising a right of exclusion, to a sole decision maker, controlling a bundle of rights. Unfortunately, this process of collecting the fragmented property rights back together could be extremely difficult. In markets, entrepreneurial property bundlers may assemble control over stores by negotiating with all the holders of rights of exclusion. However, the market route to bundling rights might fail altogether if the transaction costs of bundling exceed the gains from conversion or if owners engage in strategic behavior such as holding out for the conversion premium.

The tragedy of the storefront anticommons is that owners waste the resource when they fail to agree on a use. Empty stores result in forgone economic opportunity and lost jobs. As of 1995, about 95% of commercial real estate in Russia remained in some form of divided local government ownership. Of this commercial real estate, a significant portion was unused.

Tragedy of Anticommons in Patents and Intellectual Property Rights

Patents and other forms of intellectual property protection for upstream discoveries may stimulate incentives to undertake risky research projects and could result in a more equitable distribution of profits across all stages of R&D. However, too many owners holding patents or intellectual property rights in previous discoveries may constitute obstacles to future research. A researcher who may have felt entitled to coauthorship or a citation in an earlier era may now feel entitled to be a coinventor on a patent or to receive a royalty under a material transfer agreement. The result has been a spiral of overlapping patent claims in the hands of different owners. Researchers and their institutions may resent restrictions on access to the patented discoveries of others, yet nobody wants to be the last one left dedicating findings to the public domain. The tragedy of the anticommons in patents and intellectual property rights thus appears when a user needs access to multiple patented inputs to create a single useful product. Each upstream patent allows its owner to set up another tollbooth on the road to product development, adding to the cost and slowing the pace of downstream innovation.

The severity of the “tragedy of the anticommons” problem in patents and intellectual property rights depends on the difficulty in negotiating with the upstream patent holders. The larger is the number of separate patent holders, the more severe is the tragedy of the anticommons. On the other hand, if the upstream patent holders are united to one entity to make decisions on the aggregate royalty, it would be much easier for the downstream producers to obtain the right of using all these patents and thus avoid the tragedy of the anticommons. For example, building a DVD player requires using hundreds of patented inventions. No company could ever build a DVD player if it had to negotiate with all patent holders and obtain their unanimous consent. These patents would be worthless due to gridlock. Fortunately, the owners of the patents used in building DVD players have formed a single entity authorized to negotiate on their behalf. But if you’re creating something new that does not have an organized group of patent holders, there will be “tragedy of the anticommons.”

As suggested by Heller and Eisenberg (1998), an anticommons in biomedical research may be more likely to endure than in other areas of intellectual property because of the absence of organized group of patent holders, the high transaction costs of bargaining, heterogeneous interests among owners, and cognitive biases of researchers. In this case, policy-makers should seek to ensure coherent boundaries of upstream patents and to minimize restrictive licensing practices that interfere with downstream product development. Otherwise, more upstream rights may lead paradoxically to fewer useful products for improving human health.

The same logic can be applied to other high-tech industries besides of biomedical research. It is simply impossible to create a high-tech product these days without infringing on patents. For example, a new software or electronic device may use thousands of patents. It may not be practical even to discover all the possible patents involved, and it is certainly difficult to negotiate with thousands of patent holders individually. Therefore, overprotection on the patents or intellectual property rights may easily lead to a tragedy of anticommons for future product or technology development.

Tragedy of the Anticommons in Water Markets in the United States

Bretsen and Hill (2009) proposed another typical example of tragedy of the anticommons in water markets of the United States. Water shortages are becoming an increasingly important concern in much of the American West. Urban and environmental demands for water are increasing rapidly, and both physical and institutional constraints prevent new water supplies from being developed. With increasing demands for water for municipal, industrial, and environmental uses, transfers of water from agricultural irrigation to other uses will produce economic gains. A study of water transfers between 1987 and 2005 revealed dramatic differences in the value of water in urban uses versus agricultural uses (Brewer et al. 2008). Other estimates place the marginal value of water in municipal and industrial use at three to four times its marginal value in agricultural uses (Carey and Sunding 2001). However, in the face of increasing demand for water for urban and environmental uses in the western United States, water transfers out of agriculture have been fewer than one would expect based on price differentials, and most of those that have occurred have required extensive negotiations. The reason for the difficulty in water transfer lies in the tragedy of the anticommons, since the existence of multiple rights of exclusion unbundled from the rights of use under the prior appropriation doctrine in the American West creates an anticommons that has impeded water transactions.

The multiple exclusion rights are the result of the evolutionary path of water institutions and the expansion of certain legal doctrines, such as the public interest and public trust doctrines which were originally designed to protect the property rights of people who used navigable waters and who depended on return flows from other irrigators.

The existence of multiple veto rights over water that are not bundled with use rights makes marketing of water difficult in the American West. In some cases no water trades will occur because of the multiplicity of veto rights; in other cases the tragedy of the anticommons leads to protracted and expensive negotiations with the need for side payments to secure the approval of all concerned. Furthermore, even after water transfers have been placed under contract, there is still the strong possibility that lawsuits can be brought to invalidate such transfers. The end result is an anticommons in which exclusion rights prevent the exercise of use rights and lock water into lower-value agricultural uses rather than allowing voluntary transfers into higher-value municipal, industrial, and environmental uses.

Tragedy of the Anticommons in Enterprise Licensing in China

As a developing country in the process of transition, China has inherited a complicated bureaucratic system of regulation from its past as a centralized planned economy. For several decades (which continues on today), almost all areas of business have been more or less under tight regulation. Routine enterprise licensing procedures involved multiple sign-offs and approvals, each with an independent right to reject any application. To get an investment project approved, an entrepreneur needs the permissions from all the related government agencies in the chain of licensing procedures, such as the local governments’ administration for industry and commerce, local environmental protection bureau, local health bureau, local construction bureau (for safety work concern), fire prevention guards, and so on.

Without bribery, a government licensing agency may benefit little from approving the project but may bear great responsibilities if the project they passed caused environmental, safety, or other accidents later. The government licensing agency faced with such an asymmetry between return and responsibility may simply choose to exercise its veto right to avoid the potential responsibilities in the future. So long as any one of the licensing agencies chooses to exercise its veto right, the entrepreneur’s investment project will be rejected. Therefore, with the assumption of no bribery, an entrepreneur’s project may be easily rejected when there are multiple licensing agencies, leading to a tragedy of the anticommons. As shown in Ying and Zhang (2008), the larger the number of licensing agencies in the procedure is, i.e., the higher the fragmentation of the licensing right is, the higher the possibility for the occurrence of the tragedy of the anticommons is.

In reality, the entrepreneur may bribe each licensing agency to get its project approved. However, a licensing agency may deliberately hold back its excluding right or suspend the project to ask for a higher bribery later. Meanwhile, the government officials in charge of the licensing process are running at the risk of getting caught as criminals by accepting the bribes and thus may ask for more compensations of their risk. Consequently, it is still difficult for an entrepreneur to get its project approved by each licensing agency even with bribery, due to the high transaction costs of bargaining, heterogeneous interests and asymmetric information among entrepreneurs and licensing agencies, and cognitive biases of the licensing agencies. It is not an exaggeration that entrepreneurs may have to spend months, or even years, to obtain the necessary approvals to start their investment projects (if not completely rejected), leading to another case of tragedy of the anticommons.

Since the 18th National Congress of the Communist Party of China, the Chinese government has been reforming the current bureaucratic licensing system to significantly reduce the number of administrative approval and licensing items, which should be good news to ease the tragedy of the anticommons in enterprise licensing.

Other Examples of Tragedy of the Anticommons

Besides of the above typical examples, there are many other cases of anticommons in reality. As argued by Hunter (2003), the tragedy of the anticommons does not just happen in the physical world but may also occur in cyberspace. Since the opening of the Internet to commercial exploitation in 1992, commercial operators have grown exceedingly fat, relying on the public character of the Internet and their easy access to the vast public commons on the Internet that was created before they ever arrived. However, by carving out remarkable new property rights online, the commercial operators are enclosing cyberspace. They have set up barriers to the use of their online resources, which may erode cyberspace’s public commons. To obtain access to some online resources that are all necessary to create a new online innovation or product, a user may need the permissions from a bunch of existing commercial operators, each of whom is endowed with an excluding right. The difficult negotiations with each excluder may lead to a tragedy of digital anticommons.

Tragedy of the anticommons may also occur in the construction of municipal infrastructures and new building or during the urbanization process in transitional economies such as China. During the process of urbanization, or for the sake of improving municipal infrastructures, it might be necessary to construct new buildings in cities, roads, railroads, and similar transportation arteries, as well as other public facilities. Although the benefit to society from these constructions may be substantial, every single property owner along the way of construction must agree on the plan. This provides conditions for the tragedy of the anticommons, as even if hundreds of owners agree, a single landowner can stop the new construction, e.g., the road or railroad. The ability for one person to veto the construction drastically increases the transaction costs and thus may cause tragedy of the anticommons. In some cases when negotiations with each excluder are extremely difficult, even some illegal violence instead is used to drive the “nail household,” i.e., the ones who insist on staying without accepting the proposed compensations, out of the way, leading to brutal conflicts and other social tragedies.

Similarly, Heller (2008) indicates that the rise of the “robber barons” in medieval Germany was the result of the tragedy of the anticommons. Nobles commonly attempted to collect tolls on stretches of the Rhine passing by or through their fiefs, building towers alongside the river and stretching iron chains to prevent boats from carrying cargo up and down the river without paying a fee. The multi blockers along the river thus provided conditions for the tragedy of the anticommons.

Types of the Tragedy of Anticommons

Heller (1998) classified the tragedy of the anticommons into two types: legal anticommons and special anticommons. In a legal anticommons, substandard bundles of rights are allocated to competing owners in a normal amount of space, such as a storefront. By contrast, in a spatial anticommons, an owner may have a relatively standard bundle of rights but too little space for ordinary use.

In another way, Parisi et al. (2004) classified the tragedy of the anticommons into simultaneous and sequential anticommons. In the simultaneous case, various right holders exercise exclusion rights at the same time, independently. This may involve two agents linked in a coincident relationship, such as multiple co-owners with cross-veto powers on other members’ use of a common resource. As an illustration, we can think of the choice of multiple land owners on whether to contribute their property for a joint venture development. Each parcel of land enters at the same level as an input of production for the joint development. If all parcels of land are necessary for the realization of the development, the multiple parcel owners would effectively hold a cross-veto power for the realization of the joint project. In the sequential case, the exclusion rights are exercised in consecutive stages, at different levels of the value chain. The various right holders exercise exclusion rights in succession. This may involve multiple parties in a hierarchy, each of whom can exercise exclusion or veto power over a given proposition. As an example, a land owner grants building rights to a third party, who, in turn, grants a partial use right to another. If reunification of the land is desired, a vertical chain of contracting would be necessary. The grantor of the building rights would have to repurchase those rights from his/her grantee; in turn, the grantee of building rights would have to repurchase the partial use rights that he/she granted, and so on. The difficulty in reaching all these sequential repurchase agreements will cause a sequential tragedy of the anticommons. Both simultaneous and sequential anticommons problems are the result of nonconformity between use and exclusion rights.

A Formal Model of the Tragedy of Anticommons

Buchanan and Yoon (2000) proposed a formal economic model to explain the tragedy of the anticommons as a mirror image of the tragedy of commons. In their model, Q measures the quantity of usage, and P measures the average value of a unit product, where there is a linear relationship between P and Q as follows:

$$ P=a- bQ $$

(1)

where a and b are positive constants. Consider, first, the two-person case, where A and B are to be assigned either (i) usage rights or (ii) exclusion rights. In either case, explicit collusion will allow for attainment of the efficient solution. In collusion, the optimal choice of Q is to maximize the total rent:

$$ \underset{Q}{\operatorname{Max}}\ PQ=\left(a- bQ\right)Q $$

(2)

The solution to this optimization problem is Q* = a/2b, while the corresponding maximum rent (i.e., the total value of the products) is a²/4b.

Now suppose that the required mutual trust is absent and joint action is impossible. In the first case, if each person is assigned a right to use the facility but cannot exclude the other from usage, the interaction will converge on an equilibrium that is analogous to Cournot-Nash duopoly. Person A chooses the level of usage, Q₁, to maximize his/her rent, given person B’s choice of usage, Q₂. The rent to person A will be

$$ \underset{Q_1}{\operatorname{Max}}\ P{Q}_1=\left(a-b{Q}_1- bQ2\right){Q}_l $$

(3)

Similarly, person B chooses the level of usage, Q₂, to maximize his/her rent, given person A’s choice of usage, Q₁. The rent to person B will be

$$ \underset{Q_2}{\operatorname{Max}}\ P{Q}_2=\left(a-b{Q}_1- bQ2\right){Q}_2 $$

(4)

The Nash equilibrium of the maximization problems (3) and (4) yields Q₁ = Q₂ = a/3b, and the total usage Q = Q₁ + Q₂ = 2a/3b, which is larger than the efficient usage (a/2b) in the collusion case, leading to the overuse of the resource, i.e., the “tragedy of commons.”

Alternatively, if each person is assigned a right to exclude but no independent usage right, then he/she can exercise this excluding right by setting the price of his/her ticket independently from the practice of the other owner. Let P₁ denote the price of person A’s ticket and P₂ denote person B’s ticket. Users are required to secure both tickets by paying the total price P = P₁ + P₂ for each unit of usage of the facility. Using Eq. 1, the quantity demanded by the users, Q, will be determined by

$$ {P}_l+{P}_2=a- bQ. $$

(5)

A Nash equilibrium can be obtained by formulating a game in which each owner tries to maximize his/her rent by setting his/her ticket price. Person A chooses P₁ so as to

$$ \underset{P_1}{\operatorname{Max}}\ {P}_1Q={P}_1\ \left(a-{P}_1-{P}_2\right)/b $$

(6)

From the first-order condition of this maximization problem, we can express P₁ as a function of P₂:

$$ {P}_l\left({P}_2\right)=a/2-{P}_2/2 $$

(6a)

Similarly, we can express P₂ as a function of P₁:

$$ {P}_2\left({P}_1\right)=a/2\hbox{--} {P}_1/2 $$

(6b)

Solving the system of simultaneous equations gives a stable solution, P₁ * = P₂ * = a/3. The price a user pays is P * = P₁ * + P₂ * = 2a/3. The corresponding total usage is Q = (a − P*)/b = a/3b, which is smaller than the efficient usage in collusion case, leading to an underuse of the resource, i.e., the “tragedy of the anticommons.”

Although the above model only includes two owners for simplicity, it can be generalized to any number of owners, while the main conclusion remains unchanged: in the case of commons when each owner is endowed with usage right but without excluding right, there will be overuse of the resource; in the case of anticommons when each owner is endowed with excluding right but without independent usage right, there will be underuse of the resource. It can be further proved that the larger the number of owners is, the less efficient the usage of resources will be, either in the case of commons or in the case of anticommons.

The above model also demonstrates that the tragedy of the anticommons is just a mirror image of the tragedy of commons. The equilibrium in either the multiple-user model or the multiple-excluder model is structurally analogous to that familiar in Cournot-Nash duopoly-oligopoly settings of interfirm competition. Competition among users, on the one hand, or among excluders, on the other, tends to reduce the total rents to the owners, which represents the efficiency of usage in the commons/anticommons model setting.