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David P. Baron
Graduate School of Business, 518 Memorial Way
Stanford University, Stanford, CA 94305-5015
This paper introduces the subject of private politics, presents a research
agenda, and provides an example involving activists and a ﬁrm. Private politics addresses situations of conﬂict and their resolution without reliance on
the law or government. It encompasses the political competition over entitlements in the status quo, the direct competition for support from the public,
bargaining over the resolution of the conﬂict, and the maintenance of the
agreed-to private ordering. The term private means that the parties do not
rely on public order, i.e., lawmaking or the courts. The term politics refers
to individual and collective action in situations in which people attempt to
further their interests by imposing their will on others. Four models of private politics are discussed: (1) informational competition between an activist
and a ﬁrm for support from the public, (2) decisions by citizen consumers
regarding a boycott, (3) bargaining to resolve the boycott, and (4) the choice
of an equilibrium private ordering to govern the ongoing conﬂicting interests
of the activist and the ﬁrm.
The problem of social order lies at the heart of human interaction.
Concerned with recurring civil conﬂict, Hobbes (1651, pp. 185–186)
argued that without a “common Power” society would be in a “warre,
as is every man, against every man.” The result would be a life
“solitary, poore, nasty, brutish, and short.” Hobbes’s solution was the
state, a Leviathan, to provide public order. In contrast, Nozick (1974)
argued that people would voluntarily form associations to provide
social order, and those associations would be alone in their authority
to coerce people. The social order would then be privately provided
An earlier version of this paper was presented as the Nancy L. Schwartz Lecture,
Kellogg Graduate School of Management, Northwestern University, April 25, 2001. This
research has been supported by NSF grants SBR-9869177 and SES-0111729. I would like
to thank Robert Inman, Keith Krehbiel, Thomas Lyon, Roger Myerson, Eric Rasmussen,
Alan Rugman, and two anonymous referees for their helpful comments.
© 2003 The Massachusetts Institute of Technology.
Journal of Economics & Management Strategy, Volume 12, Number 1, Spring 2003, 31–66
Journal of Economics & Management Strategy
and endogenously determined through voluntary participation in the
associations. This essay is concerned with endogenous private order
as a resolution of conﬂicts among individuals and with the private
politics surrounding it. The objective is to examine selected aspects
of private politics, identify a set of research questions, and identify
factors relevant to those questions.
Coase (1960) advanced the analysis of social order by observing
that in the absence of transaction costs individuals would bargain to a
Pareto-efﬁcient resolution of disputes and, if transfers could be made,
to a welfare-maximizing outcome. Moreover, this efﬁciency would be
achieved regardless of how initial entitlements or property rights were
allocated among the parties. The role of the state in achieving social
efﬁciency then would simply be to assign and enforce property rights.
If transaction costs were high, however, bargaining among the parties to a dispute could be inefﬁcient. Moreover, even if there were no
transaction costs, the distributive consequences of the assignment of
property rights would create incentives for political competition over
the assignment of entitlements.
Calabresi and Melamed (1972) took Coase’s perspective two
steps further. First, they argued that in the absence of transaction
costs not only could entitlements be assigned arbitrarily and efﬁciency attained, but those entitlements could be protected by either a
property rule or a liability rule. Second, in the presence of transaction
costs a liability rule could be more efﬁcient than a property rule. The
protection of entitlements then should depend on the relative costs
associated with alternative forms of public order, e.g., reliance on the
courts or regulation.
Ellickson (1991) argued that the cost of public order—i.e.,
government-provided social order, such as relying on the courts to
resolve disputes—could be high. It is costly to establish rules, enforce
them, and revise them in light of new developments. When the
costs of accessing the institutions of public order are high, individuals may provide private rather than public order. Ellickson argued
that norms supported by repeated interactions provide the basis for
private dispute resolution, and although such norms are sustained
in the shadow of the institutions of public order, those institutions
need not be accessed. He referred to this set of norms as a private
ordering and supported his perspective with a detailed study of how
residents of Shasta County, California, resolved disputes arising from
wayward cattle. The resolution of those disputes, he argued, seldom
depended on the applicable public law. The resolution of disputes has
obvious distributive consequences, and settlements depend on the
status quo and the alternatives available to the individuals involved.
The status quo is thus the subject of politics; thus, ranchers and homeowners sought to deﬁne the status quo in a manner favorable to their
McMillan and Woodruff (2001) identiﬁed a continuum of
“order” in economic and social interactions extending from the private orderings studied by Ellickson to state-supported order through
regulation and the courts. They focused on “private-order organizations,” such as trade associations, that facilitate economic exchange by
providing information and coordination for their members. The law
merchant (Milgrom et al., 1990), trading companies, clearinghouses,
and arbitration systems are examples of private-order organizations.
These organizations typically have as members either trading partners or ﬁrms participating in an industry. Private politics focuses
instead on private orderings formed by opposing interests, not all of
whom need participate in economic transactions.
This essay focuses on situations of conﬂict among individuals
and the resolution of that conﬂict without reliance on the law. It
extends the study of private orderings by taking both a step backward and a step forward. The step backward is to consider the origin
of the conﬂict and the politics associated with it, and the step forward
is to consider how a private ordering addresses future as well as current disputes. This perspective takes both Hobbes’s view that social
order provides beneﬁts to individuals and Nozick’s view that individuals voluntarily form private orderings to govern their own conduct.
The costs associated with private and public order are not explicitly considered here, but often the situations are ones in which rights
and entitlements are not well deﬁned and jurisdictions may not be
clear. For example, a dispute may cross the borders of countries. The
Coasean view that private bargaining can resolve disputes is central
to this perspective, but transaction costs of various forms are present.
More importantly, the status quo, which serves as the starting point
for Coase and for Calabresi and Melamed, may be endogenous to the
economic and political strategies of the participants in the conﬂict.
Private politics encompasses strategic competition over entitlements in the status quo, direct competition for support from the public, bargaining over the resolution of the conﬂict, and maintenance
of the agreed-to private ordering. The term private means that the
parties do not rely on the law or public order; i.e., on lawmaking or
law enforcement, although both may be available. The term politics
refers to individual and collective action in situations in which people attempt to further their interests by imposing their will on others.
In public politics this generally involves a rule that allows a majority
to impose its will on a minority. The private politics considered here
Journal of Economics & Management Strategy
does not involve voting but does involve the public. The public is not
viewed as a unitary actor but instead as individuals whose actions
are voluntary and may or may not be similar. The resolution of the
conﬂict, if there is one, is by mutual agreement, but collective action
by the public determines the threat point and hence the resolution of
the conﬂict. The result can be a private ordering established by opponents and designed to maintain order given the continuing conﬂicting
interests of the parties.
2. Changing Strategies
To provide focus and narrow the scope of this essay, the emphasis
will be on issues initiated by individuals and groups and directed at
the policies and practices of ﬁrms. The initiators will be referred to
as activists, and their interests are assumed to conﬂict with the proﬁt
objectives of ﬁrms. The strategy of the activists to achieve changes
in the ﬁrm’s practices may involve government, as in the case of
regulation or new legislation, or it may involve private politics. A
private-politics campaign could have as components the selection of
the target, direct action against the ﬁrm, communication with the public, initiation of a boycott, and bargaining.
The choice between public and private politics is strategic, and
activists may increasingly be choosing private politics. Commenting
on the boycott campaign against Exxon Mobil for its stance on global
climate change, Paul Gilding, former head of Greenpeace, said,
The smart activists are now saying, “O.K., you want to play
markets—let’s play.” [Lobbying government] takes forever
and can easily be counter-lobbied by corporations. No, no,
no. They start with consumers at the pump, get them to
pressure the gas stations, get the station owners to pressure the companies and the companies to pressure governments. After all, consumers do have choices where they
buy their gas, and there are differences now. Shell and BP
Amoco (which is also the world’s biggest solar company)
both withdrew from the oil industry lobby that has been
dismissing climate change.1
Technological change may have contributed to this change in
strategy, with the Internet enabling private politics on a worldwide
scale. Carol Browner, former head of the Environmental Protection
1 The New York Times, June 2, 2001.
Agency (EPA) said, “Environmental groups have become truly sophisticated in using the Web to move information to millions of people literally overnight, and to attack companies on a global scale.”2
For example, an important strategy of environmental groups is to
release information about pollution at the local level. Environmentalist seek the release of information about local pollution as a means of
mobilizing local groups to take action directly against polluters. In the
US environmentalists were successful in obtaining legislation directing the EPA to collect and make public information on the release of
chemicals that might be carcinogenic. The annual publication of the
Toxic Releases Inventory is a major event used by environmentalists
to mobilize local citizens.
At the global level Rugman and Verbeke (2002) discuss the
impact of what they refer to as “internet anarchy.” In the effort within
the OECD to develop a Multilateral Agreement on Investment (MAI),
activists obtained a copy of a working draft and released it on the
Internet. The objective of the activists was to release information that
local-interest groups and NGOs could use to conduct local politics
in their country. The local politics caused some countries to back
away form the MAI, causing it to be abandoned.3 Characterizing
the actions, Kobrin (1998) stated, “Much of the anti-MAI sentiment
on the Internet presents barely credible worst-case scenarios as fact.
As the OECD discovered, much to its chagrin, there are no controls
on the Net over who can ‘publish’ or what they can say.” These
examples also indicate the importance of viewing the public as a
collection of dispersed individuals with local information.
Private orderings to govern the conduct of ﬁrms are not new.
One of the best known was the Sullivan Principles for conducting
business in South Africa during the apartheid period. The use of private orderings as a resolution of the conﬂict between activists and
ﬁrms, however, appears to have grown over the past decade as a
result of private politics. For example, privacy in electronic commerce
is supported by private institutions, such as TRUSTe, which certify the
privacy policies of Web sites. The government also has begun to rely
on such private institutions, as in the case of using TRUSTe as part
of the Safe Harbor for ensuring adequate protection for the transfer
of personally identiﬁable information from the European Union, as
required by its data protection directive.4
2 The New York Times, September 9, 2001.
3 As Rugman and Verbeke indicate, the MAI also may have failed as much because
of a weakening of support by the US.
4 See the case The European Union Data Protection Directive in Baron (2003, pp. 545–
Journal of Economics & Management Strategy
In the wake of protests against sweatshops in Asia, activists and
footwear and apparel companies formed the Fair Labor Association to
govern working conditions in suppliers’ factories. A private ordering
has been established for fair-trade-certiﬁed coffee, cocoa production
has come under a private ordering, and activists and diamond companies have established certiﬁcation of conﬂict-free diamonds to stem
violence in Sierra Leone ﬁnanced by black-market diamonds. Thirdparty certiﬁcation has also been established for milk from rGBH-free
cows, Paciﬁc tuna is now dolphin-safe, and activists and ﬁrms have
formed a number of organizations to encourage voluntary efforts to
address global warming. Activists, backed by boycotts of Home Depot
and Lowe’s, reached an accord with timber companies to protect the
Great Bear Rainforest in British Columbia. These private orderings
resolve conﬂicts and govern future conduct through self-regulation
by mitigating commitment, coordination, information, and free-rider
Some private orderings are simply public commitments to
changes in practices. For example, Greenpeace organized a campaign against Coca-Cola in conjunction with the 2000 Olympics in
Australia. Greenpeace sought the elimination of HFCs from soda
vending machines and provided on the Internet downloadable pictures of Coca-Cola’s polar bears pacing on a melting iceberg. Using
the Internet and other media, Greenpeace launched a communication
program asking the public to download the pictures and tape them
to Coca-Cola vending machines. Coca-Cola conceded and announced
that it would eliminate HFCs by the time of the next Olympics.
The examples of private politics we remember are generally
the ones where the challenge has been successful, as in the cases
of tuna, apparel and footwear, and coffee. If data were available on
all attempts at private politics, however, most would probably be
found to be failures. More important than either successful or failed
attempts, however, may be the proactive measures adopted by many
ﬁrms to avoid private politics.
Just as one cannot infer the importance of the presidential veto
by examining the small proportion of bills vetoed, one cannot infer
the signiﬁcance of private politics from the number of campaigns initiated. Congress anticipates the president’s veto and modiﬁes its bills
so they will withstand a veto, and thus the president vetoes few bills.
Many ﬁrms attempt to avoid private politics by proactively adopting policies that reduce the likelihood that they will become a target.
Some of these attempts are little more than public relations, but many
represent real commitments to changes in policies and practices. The
inﬂuence of private politics is thus greater than indicated by the number of observed conﬂicts.
3. An Example of Private Politics
Private politics pertains to a variety of goods, but particularly to credence goods whose characteristics cannot be discerned even through
consumption and use.5 A consumer may not know the working conditions in the overseas factory that produced a pair of shoes or the
pollution generated in conjunction with the production of a product.
Similarly, a consumer may not know the uses to which revenue is
put, as in the case of ﬁnancing violence in Africa through the sale of
conﬂict diamonds. When consumers and the public care about such
unobservable characteristics, political action can arise to challenge the
practices of ﬁrms.
A quintessential example of private politics centered on work
practices in apparel and footwear factories, particularly in Southeast
Asia. The natural target was Nike, which not only was the largest
company in this market segment but was also an aggressive competitor that was in the face of the public. Beginning in the early 1990s,
activists and union organizers began calling attention to the working
conditions in the “sweatshops” producing for the American market.6
The news media provided extensive coverage of the issue, and a number of widely publicized incidents of abusive practices and reports of
low wages, long hours, and forced overtime provided ample fuel for
the ﬁre. The motivation for the protests was not just the working conditions. The Union of Needletrades, Industrial and Textile Employees
(UNITE) sought to raise the costs in Asian factories to protect the jobs
and wages of their members in the US.
In the early years of the protests against its work practices Nike
categorically rejected the allegations of the activists. Nike owned no
factories, as a Nike spokeswoman explained: “We’re about sports, not
manufacturing 101.” In Nike’s 1996 annual report CEO Phil Knight
stated, “Yet no sooner had the great year ended than we were hit by
a series of blasts from the media about our practices overseas.” Knight
argued that not only were the factories of its suppliers not sweatshops,
but that Nike provided badly needed jobs to people who were eager
for them. He pointed to the experiences of Japan, South Korea, and
Taiwan which transitioned from low wages and long hours to high
per capita incomes. He explained, “When we started in Japan, factory
labor there was making $4 a day, which is basically what is being paid
in Indonesia and being so strongly criticized today. Nobody today is
saying, ‘The poor old Japanese.’ We watched it happen all over again
5 See Feddersen and Gilligan (2001) for a signaling theory with credence goods.
6 See the case Nike in Southeast Asia in Baron (2003, pp. 113–116).
Journal of Economics & Management Strategy
—12 companies (e.g., Nike), 21 NGOs (six board seats for each group).
—170 college and university afﬁliates (three seats).
—Chair has one seat.
—982 companies (university licensees) have applied to be afﬁliates.
• Code governing workplace practices: [60 hour week; minimum
wage/market wage (no living wage); children at least 15 unless host
government allows 14; right to form unions; etc.].
• Procedures: supermajority to change code (both sides can block
any changes); supermajority for selecting the chair.
• Independent monitoring and inspection of factories:
—Companies select the monitor from an FLA accredited list.
—30% of factories for initial 2 to 3 years; 10% annually thereafter.
—Companies are to monitor each facility annually.
• Requires a plan to correct deﬁciencies.
• Reports publicly on monitoring/inspectio ...