Social Construction of Rational Self-Interest: The Case of Business Improvement Districts

Abstract

Everybody – or at least every policy analyst – knows that the logic of collective action is such that individuals' self-interested rationality inevitably leads to collective irrationality: Dominant individual strategies in collective-action settings lead typically self-interested individuals to defect rather than cooperate. As Elinor Ostrom has pointed out, however, "The fact that something is widely believed does not make it correct . . ." (2000b, p. 33). In fact, her own empirical work of the past two decades (Ostrom, 1990, 1995, 1998, 1999, 2000a; Ostrom, Gardner, & Walker, 1994) identifies a puzzle: individuals frequently cooperate voluntarily, in both laboratory and field settings, when the rules of individual rationality apparently dictate that they should not. Self-governance appears to be highly effective as an instrument for achieving collective rationality, to a degree that appears to be at odds with the accepted wisdom about rationality, institutions, and collective action. This paper uses evidence from a comparative analysis of two self-governing and two externally governed business improvement districts (BIDs) in the U.S. to propose at least a partial solution to Ostrom's puzzle: that self-interested, economic rationality is socially constructed, and so can be reconstructed to foster cooperation rather than defection.

Keywords: rationality, self interest, cooperation, business improvement districts

JEL Classification: D21, D71, L21