Taking Stock of Local Institutions: An Institutional Analysis

of Social Enterprises in the Danajon Community Watch

Project

Miguel Barretto Garcia,

DCW Project Endline Study Research Consultant

INTRODUCTION
Why Institutions Matter
Douglass North, Nobel laureate in economics, had insisted throughout the course of his career
that institutions matter. Institutions are the sets of rules that govern repetitive human
transactions in the face of uncertainty. These sets of rules can be formal, such as the laws and
structures operationalizing governments, corporations, markets, and community organizations.
These rules can also be informal, such as unwritten conventions, stereotypes, or social norms
that heuristically govern everyday human transactions.
However, humans are fallible creatures. If they simply abide to rational expectations as
suggested in economic theory, then these institutions will trivially operate under the standards of
maximizing efficiency and constrained optimization. However, human beings are not like that.
We have emotions that induce us to punish people even if the rational outcome is to just veer
away from conflict. We have a limited cognitive architecture that succumbs to endogenous
biases of our beliefs and cognitive limitations of learning and processing information.
These human limitations interact with the rules. It is more often the norm rather than the
exception that these cognitive constraints spill over into the institutions cost function. Apart from
physical resource constraints that enter into our cost function, there are also transactions costs
that, as institutional analysts and designers, has to be taken into account in designing
institutions in order for us to determine their expected outcomes.
Apart from human fallibility are exogenous uncertainties in the environment and uncertainties
brought about by human interaction. Communities face natural hazards such as typhoons and
floods and social ills such as poverty, human trafficking, and drug abuse. These uncertainties
naturally disrupt the repetitive order of things in the community. Communities will find
themselves perplexed in dealing with these uncertainties once we factor in our cognitive
limitations.

The Project
The Danajon Community Watch (DCW) Project sought to narrow down two such uncertainties:
(1) natural disasters that raises the vulnerability of local low-income communities along the
coastlines of the Visayas region; and, (2) human trafficking arising from these vulnerabilities on
community livelihood. In 2014, a baseline study was conducted to identify the links between
these two types of uncertainties on coastal communities along the Visayas region. The baseline
study found no direct link between the two uncertainties, but revealed a latent intermediary link:
the low-income nature of these communities. In other words, it is not that natural disasters
cause the increase of human trafficking per se, but because natural disasters affect low-income
households, the livelihood damages generated brought about by these natural disasters
increases the vulnerability of community members to human trafficking.
The project targeted its interventions at the community and institutional levels using six Key
Results Areas (KRAs). At the community level, KRAs 1 and 3 sought to increase awareness
within the communities regarding their vulnerabilities to natural disasters and human trafficking
(KRA 1) and measures to increase their preparedness (KRA 3). At the institutional level, there
were KRAs that sought to organize community-based watch groups to reduce these
vulnerabilities (KRA 2), strengthen these communities through capacity-building in human
trafficking and disaster risk reduction and management (DRRM) (KRA 4), enhance a
community-based quick response system (KRA 5), and monitor and document best practices
within the community (KRA 6).
Because it was clear that the latent factor of the communitys socio-economic situation is driving
these vulnerabilities, it sought to strengthen these communities by setting up social enterprises
on top of the DRRM and human trafficking capacity building programs. It is also not clear
whether these
A fieldwork evaluation on the project was conducted last 2016. The evaluation provided key
insights on how the project can move forward, particularly in the delivery of outcomes before the
project closes in September 2017. The evaluation found the project to have generally met its
overall objectives, but recognized many institutional challenges facing the communities,
particularly in the delivery of its livelihood projects. Moreover, the evaluation report did not
provide a full diagnosis on the underlying institutional settings, structures, and incentives of
each of the individual community organizations involved in the project. Hence, this endline study
seeks to fill this gap.

The Nature of Nested Games

The DCW project assumed the interaction between the communitys socio-economic situation
and the twin uncertainties between natural disasters and human trafficking. The key
interventions involved setting up community livelihood projects while simultaneously
capacitating these groups in disaster and human trafficking preparedness. In effect, the project
has turned these community groups into social enterprises: organizations with the role ensuring
a profit that members of the members of the community as a whole can enjoy in order to
mitigate the external or internal vulnerabilities, such as the loss of livelihood due to natural
disasters or the internal incentives forcing many community members to accept exploitative
means of livelihood, such as human trafficking. A way to dissect these complicated interactions
is to break them into nested games.
The Anatomy of a Nested Game. In economics and the social sciences, a game is an
environment where players have to solve strategic or cooperative interactions in order to
maximize their individual well-being. To analyze games, we need to identify the number of
players involved, the amount of information that players know about other players, the amount
of information that players know about the rules of the game they are playing, the strategies or
moves that they are allowed to carry out in the game, and their incentives or payoffs. Nested
games, on the other hand, are interactions of various games that players may be playing
simultaneously across various layers.
Institutions do not exist in a vacuum. In our research setting, the community members do not
simply play among other community members. They engage with their families, their peers in
organizations, with the local government, with other community organizations. As nested
games, they play games with these other players and the strategic outcomes arising from their
decisions have direct or indirect effects with the other games they are playing. Below are a few
examples how community organizations interact with each other under various settings.
A Public Goods Game. From a game-theoretic point of view, social enterprises are playing a
repetitive long-term public goods game. Members of the community are players who have the
primary incentive of ensuring their individual needs are met, but they are tied together through a
common pool resource. The inter-individual interactions raise the level of complexity in the
game, because they have to ensure that they optimally contribute to the common resource if
they want to optimize the shared profit they split together. Standard economic theory suggests
that rational people prefer not to join in these types of games, because they expect other
players to simply free-ride on other peoples effort, and to mitigate these costs, they simply do
not participate in these types of institutional arrangements.
However, it has been repeatedly shown through various laboratory and field experiments that
people are willing to cooperate in order to meet their shared goals. Standard economic theory
also fails to take into account that settings where there is an absence of clearly property rights
that delineates the resource for private consumption, the players of the game are tied to the
underlying institutional arrangement. Many of these communities, including those in the DCW
coastal areas, have livelihoods whose property rights are not legally or physically possible, e.g.
fishing and seaweed gathering, or that resources have to be pooled together in order to achieve
economies of scale, bargaining power through wholesale transactions, and reduced
transactions costs.
Principal-Agent Problem. While it has been shown that people do depart from the rational
choice of not engaging in public goods settings such as social enterprises, the rational
incentives of the free-rider problem still poses a threat. In the absence of strong institutional
mechanisms that induces people to cooperate and not shirk from their contributions to their
overall output, it is expected that social enterprises will perform sub-optimally. The game further
complicates when added layers are included, such as punishment and incentive mechanisms
enforced by organizational managers and leaders. This is an internal principal-agent problem
that the designated leaders have to deal with their members who are tasked to perform specific
supply-side dutiese.g. resource gathering, production, marketing, auditingin the social
enterprise as it strives to bring down costs, increase production efficiency, and raise group
motivation.
Investment and Employment Games. The social enterprise also plays a game with Nature and
with human traffickers, adding another level of complication into the game dynamics. Natural
disasters are random shocks that disrupt the whole production line of the social enterprise. The
social enterprise faces an investment game on how much it has to allocate resources for future
replacement of damaged input and resources that it has to invest on the community today for
disaster preparedness. On the other hand, social enterprises also interact with human trafficking
syndicates as community members have to decide whether which market will yield the highest
net positive payoff for their families. These families will have to weigh in how much they can
earn in long-term income streams from each market, how each market will be costly to them in
terms of effort used or even ethical principles, or how reliable or trustworthy transactions are in
order to carry out the actions.
These are among a few textbook examples of the many layered nested games that these
community organizations face as social enterprises. In fact, there may even be more interesting
interactions or nested games within or around social enterprises that may prove informative in
determining the projects long-term sustainability in carrying out its desired goals. Identifying the
games community members play with each other as they attempt to minimize the uncertainties
brought about by natural disasters and human trafficking through a shared social enterprise is
the primary aim of this endline study.

PROBLEM AND METHODOLOGY

Research Problem
This endline study for the DCW project seeks to address the following questions:
1) What are the layers and levels of nested games these social enterprises play? How do
these varying games interact with each other in carrying out the projects key results
areas?
2) How do social enterprises reduce the uncertainties of natural disasters and human
trafficking through their livelihood and capacity building interventions? What are the ideal
institutional arrangements that ensure these goals are carried out? What are the real
constraints that is keeping these enterprises from achieving the ideal optimal institutional
arrangement?
3) How have these social enterprises performed or functioned in carrying out their goals?
Have they become financially sustainable? What are the constraints involved? Are there
already well-organized production line and properly-trained workers in place? How viable
are the products they are selling in the market, given the competition? Do they have
direct access to the market or do they have pass by an intermediary? Are there products
final output goods or input raw materials used by other companies? Do they produce a
homogenous product or a diverse set of products?
4) How do the underlying biophysical environment, community attributes, and social rules
and norms structure the institutional arrangements of the games these social enterprises
play?
5) What is the extent of the institutional overlap between BantayBanay or community watch
groups and the livelihood projects? Do they have the same or different individuals or
organizations? How often do they coordinate with one another?
6) How are newly-formed community organizations set by the DCW project different from
already-established community organizations involved the project in terms of adapting to
the project interventions?
7) How does membership composition, size, common pool resource, transaction
constraints, organizational efficiency, and social cohesion affect in their ability to carry
out the intended key results areas?
 8) How all these factors in (4) and (6) inform institutional differences in terms of the social
enterprises responsiveness to adopt to DRRM or human trafficking interventions?
9) What are the common institutional strengths and best practices from all these social
enterprises that needs to be reinforced further? What are the common institutional
weaknesses shared by all these social enterprises that the project can still address?
10) How can we design the underlying institutions of these social enterprises to ensure their
long-term sustainability beyond the projects completion?

Methodology
This study will conduct an institutional analysis across the social enterprises participating in the
DCW projects 36 municipalities. We loosely define social enterprises as local community
institutions who either carry out livelihood or DRRM / human trafficking interventions or both.
This is to take into account that there are two key institutions involved: the BantayBanay and
livelihood initiatives carried about local community organizations. The extent of the institutional
and organizational overlap remains unclear (as raised in (5) in the Research Problem); hence,
we will assume for now to treat these institutions as a single unit.
Figure 1. The IAD framework (Ostrom, 2005).
To address our research questions, we will use Ostroms (2005) institutional analysis and
development (IAD) framework as our analytical template. The framework has been applied to
understand the dynamics underlying institutions, particularly in settings where communities
share a common pool resource. It assumes that local community organizations begin as
informal institutional arrangements and evolve through time as formal institutions. The
framework tracks down where rules come from and how they evolve, how the underlying
biophysical environment and community attributes shape the way interactions and outcomes
within the community.
With social enterprises as our unit of analysis, the IAD framework allows us to dissect these
institutions into their nested games components. Within nested games, we can even further
dissect them into their game components, such as their payoffs and strategies. Hence, this
framework provides us the opportunity to map these institutional arrangements. This has the
advantage of allowing us to zoom-in (to identify the individual differences and context-specific
circumstances facing these different social enterprises) and zoom-out (to see the common
structural links of these enterprises). Given this very rich hierarchy of nested interactions, this
allows us to predict how these institutions will attempt to carry out optimizing their goals set by
the DCW project and adapt to the interventions provided by the project.