Use, Esteem, and Profit in Voluntary Provision: Toll Roads in California, 1850-1902

By Klein, Daniel B.; Yin, Chi | Economic Inquiry, October 1996 | Go to article overview

Use, Esteem, and Profit in Voluntary Provision: Toll Roads in California, 1850-1902


Klein, Daniel B., Yin, Chi, Economic Inquiry


I. INTRODUCTION

Sometimes individuals form an enterprise not in anticipation of handsome residual returns, but rather for their own use. If the user group is large and the project requires numerous contributors, there may be an incentive to free ride. The group might overcome the free-rider problem by virtue of social pressure, reputational incentives, participatory impulses, philanthropy, and so on - in brief, out of some form of esteem, especially the reciprocal esteem of neighbors.

During the nineteenth century, Americans undertook many improvement projects, not primarily for residual returns, but rather for use and esteem. Voluntary action helped to finance schools, libraries, hospitals, churches, canals, dredging companies, wharves, water companies, railroads, highways, and so on (Goodrich [1948]).(1) We call the set of motivations behind such efforts "use-and-esteem," in contradistinction to the quest for residual returns.

In studying the history of toll road companies in California, we see motives of both use-and-esteem and residual returns. Some road companies were initiated as business enterprises, aiming squarely at dividends. For other road companies, use-and-esteem motivations inspired a large number of community members to contribute; this we call "community enterprise." Also, there are the cases of use-and-esteem motives inducing a small number of wealthy parties to finance a road, which we call "coterie enterprise." In comparison to the earlier toll road movements in the eastern United States, the California toll road experience showed less of the community enterprise model and more of the business enterprise and coterie enterprise models.

Why should an enterprise ever be undertaken in the manner of use-and-esteem, rather than organized as a business? Use-and-esteem methods must stand in for the normal profit motive when an enterprise is unable to exclude nonpayers or charge appropriate prices.

Bruce Benson [1994] examines the private provision of policing and highways in old England and argues that obstacles to private provision stemmed from government policy rather than underlying technological conditions. For example, by barring toll-taking on highways, the government created a free-access common pool. Benson further argues that even once government policy has blocked the business enterprise, there still may be potency in the "use-and-esteem" methods of voluntary provision.

This paper presents a historical typology of voluntary organizations taking the stock-corporation form. In our study of toll roads, we indeed see the business enterprise hamstrung by government policy. But the road companies, even though often unprofitable and motivated by use-and-esteem, still operated with the possibility of positive residual returns. Thus the road companies took advantage both of financing appeals from use-and-esteem, and of organizational efficiencies due to residual-claimant incentives. This is a potent combination that today's law has eliminated by the legal bifurcation of "not-for-profit" and "for-profit" enterprises.

II. THE TOLL ROAD HERITAGE

In the 1790s Americans began building turnpikes - toll roads surfaced with gravel or earth - and over the next half century easterners built more than 600 of them, most with private funds exclusively. Turnpikes were popular throughout the Middle West and to a lesser extent the South. Later the toll road returned, as plank road fever swept the nation. Between 1847 and 1853 private initiative built better than 1,000 wooden roads.

Not ideology but pragmatics led Americans to privatize. Town, county and state governments were strapped for cash and bad at building roads, and the spirit of development led all states to release private initiative to the task. Compared to government road care, the turnpike company offered numerous organizational advantages. Turnpikes connected multiple towns or counties, so management transcended local government limitations, and organizers could appeal to prospective contributors along the entire route. …

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