Common Property Rights as an Endogenous Response to Risk

In recent years, considerable progress has been made in improving our understanding of rural institutions, including property rights (e.g., Binswanger and Rosenzweig). On close inspection property rights often turn out to be multidimensional and complex (Bailey, Migot-Adholla et al.). Despite the widely acknowledged advantages of private property rights regimes, numerous authors have demonstrated the resiliency and surprising pervasiveness of common property rights (Bromley and Chavas, Ciracy-Wantrup and Bishop, Ostrom). Although variations in weather in general, and rainfall in particular, have often been recognized as important sources of production risk and thereby as important determinants of property rights, almost all the attention has been directed to intertemporal variability. Virtually neglected have been the local (spatial) variability of rainfall and hence such important issues as (a) the extent to which the production risks of rural production covary from one local community to another, (b) the behavioral and institutional adaptations to such environmental conditions, and (c) implications for public policy. Several factors would seem to have contributed to the neglect of such issues: (a) In the more heavily studied temperate and relatively humid zones of the world, the local variability of rainfall is relatively small (Huff and Shipp; Hutchison; Jackson; Johnson and Dart; McConkey, Nicholaichuk, and Cutforth); (b) there is a dearth of data from a multiplicity of weather stations in arid r gions; (c) intertemporal variations of rainfall have been of greater interest than interregional ones; and (d) because drought-induced agricultural production shortfalls are generally associated with price increases, price risk tends to offset production risk, thereby lowering the overall importance of weather-related risk for farm incomes. However, there is strong evidence from various arid and semiarid regions (ASARs) of the world that the local variability of rainfall is considerably greater than in the more temperate and humid areas (Thompson and Wilson; Sharon, 1972, 1974, 1979, 1981; Giovinetto, 1972, 1974; Jackson). Such studies also show (a) that studies based on annual rainfall greatly understate the magnitude and impact of such variability over the relevant productive season of the year, (b) that intertemporal and local variability tend to be rather highly correlated, and (c) that in the more arid of ASARs rainfall may be insufficient for agriculture, implying that only animal husbandry might be viable. In such situations, price changes are unlikely to offset production changes. Indeed, in drought conditions, animal herders are often forced to sell off their animals at low and falling prices (distress sales), implying that production and price risk are likely to compound (rather than offset) each other. Therefore, income risk is bound to be considerably more important in the drier ASARs. Moreover, with neither insurance nor credit markets accessible to ASAR residents (for reasons identified by Binswanger and Rosenzweig), the sharp terms of trade deterioration associated with drought often give rise to severe exchange entitlement failure and famine, explaining why herders are especially prominent among those suffering from famine (Sen). Jeffrey Nugent is a professor of economics at the University of Southern California, Los Angeles. Nicolas Sanchez is an associate professor of economics, College of the Holy Cross, Worcester, Massachusetts.