Global Institutional Choice

Frederick J. Lee

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Many of today’s problems are global in nature and scope. Collective action problems such as global climate change and systemic risk in capital markets threaten to affect every person on the planet. Yet because these problems transcend national boundaries, a single nation cannot solve them alone. So what do we do?

First, we ought to look to the relevant values that collective action problems implicate. I argue that there is an economic and moral imperative to overcome collective action problems. Collective action problems stem from externalities—situations where market participants fail to incur the full cost or benefit of their activities. The canonical example is a factory where air currents export its pollution away to neighboring areas. Another example is vaccinations, where those who opt not to get vaccinated free ride off the benefit of the vaccinated person not getting sick. Externalities misalign people’s incentives, leading to either too much of a bad activity or not enough of a good activity. From an economic perspective, this market failure is an inefficient outcome. From a consequentialist perspective, this outcome is undesirable because it fails to maximize aggregate welfare.

The usual response to collective action problems is government intervention, which implicates the competing moral value of autonomy. Governments can force people to internalize their externalities through the state’s power of the sword and purse, realigning individuals’ incentives to produce the efficient market outcome. And higher level governments can force lower level governments to do the same. But the mere existence of different levels of government implicitly suggests that certain polities are better equipped to handle certain problems. And the notion that government intervention is not always the best response suggests that in some cases there may be better ways to solve collective action problems.

Therefore, second, we ought to consider the question of institutional choice. As Ronald Coase famously observed,1 free market participants can sometimes overcome collective action problems on their own through bargaining. The underlying predicate to efficient Coasian bargaining, however, is low transaction costs. Some externalities such as air pollution are widespread, making it costly to identify the affected parties and thus leading to high transaction costs. As externalities grow in scale, individuals might organize and form neighborhood organizations, labor unions, or other private institutions to overcome the mounting costs of bilateral contracting. But when the number and complexity of resource users and affected parties reach a certain threshold, government regulation may become the most efficient, and possibly only, means of overcoming a collective action problem. Given the possibility of both public and private forms of collective action, we should look for a guiding principle to discern when each is best.

We should consider the European Union’s principle of subsidiarity as this guiding principle for institutional choice. Subsidiarity is a constitutional principle that establishes a presumption in favor of local regulation, either public or private.2That presumption is rebuttable, however, when collective action problems render local regulation ineffective. In such situations, subsidiarity not only admits but demands the intervention of a higher level polity. This principle ideally balances our relevant moral values: The presumption in favor of local regulation encourages efficiency and preserves autonomy, while the imperative for higher governmental intervention to address collective action problems maximizes social welfare.

Finally, we should apply subsidiarity to the global arena. In the face of global collective action problems, nation states are ill-equipped to optimize social welfare individually. Moreover, existing international institutions—­such as the United Nations, World Trade Organization, and International Monetary Fund—­are unable to achieve the necessary level of cooperation because they are underinclusive and fundamentally lack the coercive force of a true world government. This balkanized state of the world morally compels global governance to coordinate and enforce collective action and optimize social welfare. While demanding global governance, however, subsidiarity would also cabin that power. Its presumption in favor of local regulation would protect sovereignty to a reasonable extent by recognizing sovereignty as intrinsically valuable as a matter of autonomy and instrumentally valuable as a matter of efficiency. Thus subsidiarity can alleviate the concern that global governance would entail global despotism.

The world needs a world government. Existing political and private institutions cannot solve global collective action problems like climate change or systemic risk in the world financial system by themselves. And the argument that a world government would erode national sovereignty is no longer compelling enough to dismiss the idea out-of-hand. Subsidiarity as an organic, legitimizing principle for global governance would both compel and limit a world government. Its ability to account for diverse forms of public and private collective action make it an ideal guide to global institutional choice that optimizes social welfare while preserving national sovereignty, a balance that is economically efficient and morally desirable.


Copyright © 2010 NYU Law Review.

Frederick J. Lee received his JD from New York University School of Law in 2010.

  1. R. H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 4–­6, 12–19 (1960).
  2. Consolidated Version of the Treaty Establishing the European Community art. 5, Dec. 29, 2006, 2006 O.J. (C 321E) 46.

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