Appropriable rents from Yellowstone Park: a case of incomplete contracting.

Anderson, Terry L. ; Hill, Peter J.

I. INTRODUCTION

Though the general populace accepts that national parks are and should be the domain of government, the history of our first national park, Yellowstone, reveals that from the beginning private entrepreneurs were actively involved in preserving the amenity values and capturing the amenity rents. To appropriate the rents from Yellowstone, the early entrepreneurs had to carve the amenity values from the common domain or see them dissipated through open access. Without private ownership of the land, this was accomplished through vertical integration of complementary inputs, namely transportation services and tourist facilities, necessary for the enjoyment of the natural amenities.

The extent of private sector success or failure in the history of Yellowstone can be best understood in the context of the theory of the firm as developed by Armen Alchian. His work with Demsetz [1972] and with Klein and Crawford [1978] expands our understanding of how firms contract to appropriate rents and prevent postcontractual opportunism. Klein, Crawford, and Alchian [1978, 300] distinguish between two reasons for vertical integration, both of which apply to private firms operating in Yellowstone at the time of its creation. The first is the successive monopoly problem which occurs when two monopolists supply inputs into a final product or service, and the second is postcontractual opportunism.

Our purpose here is to apply these two important threads from the firm's contractual tapestry to the formation and operation of Yellowstone National Park. The central theme is that amenity rents associated with the Yellowstone region either could be dissipated through open access and the ensuing "tragedy of the commons" or appropriated through contractual arrangements that limited entry to the commons. The former occurred until the Northern Pacific Railroad with its monopoly on transportation services vertically integrated with monopoly suppliers of tourist facilities and operated the park as if it were privately owned.(1) However, the potential for rent dissipation still existed because the railroad did not own the park itself and could not effectively contract with the federal government to restrict entry. Therefore, when the federal government opened the park to automobiles in 1915, the railroad's monopoly was eliminated and rent dissipation occurred through congestion.

II. BRIEF HISTORY OF YELLOWSTONE

The natural features of the area that is now Yellowstone National Park were well known by 1860. Following John Colter's exploration of the area in 1807, numerous other trappers and later prospectors explored "Colter's Hell." In 1865, 1870, and 1871, the first formal explorers, financed in part by Congress, were sent to Yellowstone. These explorers provided scientific information, photographs, and paintings that increased the awareness in the East about the Yellowstone area.

This awareness culminated in the creation of Yellowstone National Park by an Act of Congress on 1 March 1872, making it the first national park (though Yosemite had been established as a state preserve in 1864). Early administration of the park was haphazard because the federal government provided no funds for operating expenses. Indeed many of Yellowstone's natural features were being defaced until, in 1886, the U.S. Army assumed administrative responsibilities, stationing a cavalry troop there. The Army stayed until 1918.

At the time of Yellowstone's creation, the region was relatively inaccessible and sparsely settled, but railroads changed this. The Northern Pacific Railroad completed its transcontinental line in 1883 and immediately added a sixty-mile spur from Livingston, Montana to Yellowstone's northern entrance. In 1903, the Chicago, Burlington, and Quincy Railroad gained access to Yellowstone through Cody, Wyoming, and in 1908 the Union Pacific arrived at West Yellowstone, Montana. Finally, in 1915 the park was opened to automobile traffic.

III. VERTICAL INTEGRATION AND APPROPRIABLE RENTS

We would expect the allocation of the amenity rents from Yellowstone measured in terms of numbers of visitors to vary depending on the ownership of the land itself and on the industry structure of complementary inputs such as transportation to the park. If the land were an open-access resource, standard economic theory shows that the rents would attract entry, creating a congestion externality that would ultimately dissipate the value of those rents, as in Cheung [1970].(2) On the other hand, if the land were privately owned, the owner would restrict congestion and capture the amenity rents.

Monopolistic pricing of a specialized asset necessary for final consumption or production of the commonly owned amenity resource would lead to the same rent maximization as would private ownership.(3) This result follows because the monopolistic supplier of a specialized asset is in a position to capture quasi rents from joint production. When the specialized asset is supplied monopolistically, the congestion externality is effectively internalized by the monopolistic supplier. Therefore the specialized asset owner will restrict entry and capture the amenity rents in the price of the specialized input.

The successive monopoly problem occurs if another specialized input is also supplied under monopoly conditions. In this case, too little of the final product is supplied, and herein lies one incentive for vertical integration between the monopolistic suppliers of the complementary inputs. As shown by Blair and Kaserman [1985], internalization of the true marginal revenue and marginal costs of production through vertical integration of firms will increase the level of production. Hence resolution of the successive monopoly problem in the presence of an open access amenity resource returns the system to an efficient equilibrium with rents maximized.

The successive monopoly problem is only one reason firms vertically integrate; Klein, Crawford, and Alchian [1978, 300] explain that the other reason is to avoid "postcontractual opportunistic behavior that occurs when specialized assets and appropriable quasi rents are available." The postcontractual opportunism problem is costly to overcome even when ownership of inputs can be transferred among private owners, but when the government is involved and cannot transfer ownership, the problem is even worse. Long-term contracts or franchising provide a possible solution to this problem, but contracting with the sovereign ultimately means that the sovereign can renege and capture quasi rents.(4)

Let us summarize the implications of this theory for Yellowstone National Park. With open access, the amenity values of Yellowstone would be dissipated through the "tragedy of the commons." However, monopolistic supply of a specialized asset such as the rail link to the park would put the supplier of rail services in a position to capture the amenity rents. Unlike the typical textbook example of monopoly which yields underproduction, the combination of open access and monopolistic supply of the specialized input promotes rent maximization. The successive monopoly problem arises because final enjoyment of Yellowstone's amenities required specialized tourist facilities as well as transportation services. By vertically integrating into the supply of internal tourist facilities, the railroad should have been able to solidify its monopoly position, avoid the successive monopoly problem, and prevent postcontractual opportunistic behavior. Ultimately, however, the government as sovereign owner of the park was in a position to redistribute the quasi rents by allowing competing transportation and regulating the prices charged for rail services and tourist facilities.(5)

IV. CONTRACTING FOR YELLOWSTONE'S RENTS

Recognition of Rents and Creation of Yellowstone

It is often assumed that amenities like Yellowstone Park were saved from commercial exploitation and despoliation only because, to quote historian John Ise [1979, 1], "a few farsighted, unselfish, and idealistic men and women foresaw the national need and got the areas established and protected in one way or another, fighting public inertia and selfish commercial interests at every step." This implies either that only those farsighted few recognized the unique amenity values of the resource while others could only see value in more traditional extractive uses, or that the amenity values could not be captured by a private owner through a market process. Both of these implications are not consistent with the history of Yellowstone.

It was obvious to the earliest explorers, as trapper Osborne Russell noted in his journal in 1835, that Yellowstone had special amenity values: "There is something in the wild romantic scenery of this valley which I cannot ... describe. ... For my own part I almost wished I could spend the remainder of my days in a place like this where happiness and contentment seemed to reign in wild romantic splendor" (quoted in Haines [1977, I, 49]). The reputation of the region grew and finally culminated in three formal expeditions in 1869, 1870 and 1871.

This recognition suggests that there would be competition to capture the amenity rents. While the area was so remote in the first half of the nineteenth century that few dreamed the rents would ever be positive, Jackson [1957, 56] describes how two individuals were cutting poles to fence off the geyser basins in 1870, and how two other men attempted to privatize 320 acres encompassing Mammoth Hot Spring under the Preemption Act in 1871. Another entrepreneur, C. J. Baronett, captured a share of the rents in 1871 by building and maintaining a toll bridge across the Yellowstone River just above its junction with the Lamar River. And "Yankee Jim" and his partners Bart Henderson and Horn Miller built a toll road through a narrow canyon along the Yellowstone River just north of Mammoth Hot Springs. Yankee Jim squatted on the land necessary for construction of the road in 1871, twelve years before the land was surveyed, and opened his National Park Toll Road in July 1873.(6)

These piecemeal efforts, however, proved to be insignificant in comparison to the efforts of the most active private interest in the region, the Northern Pacific Railroad, chartered by Congress on 2 July 1862. Given the proximity of the railroad's transcontinental route to Yellowstone, it could naturally capture some of the rents by bringing passengers to this remote area. Because the main line came within sixty miles of Mammoth Hot Springs, the Northern Pacific actively supported exploration of the region. It also sponsored publicity campaigns extolling the scenic wonders of the upper Yellowstone valley. Clearly the Northern Pacific recognized the aesthetic value of the region and its potential for generating passenger traffic for the railroad.

In light of this recognition, one might think that the railroad would attempt to establish private ownership of the region rather than support legislative efforts to establish Yellowstone National Park. Surely private ownership of the land area encompassing the major attractions in the Yellowstone region would have given the railroad a more secure claim on the amenity rents, but U.S. public land policy made the establishment of property rights virtually impossible. The Homestead Act of 1862 was geared to a particular type of land use, namely agriculture. It and subsequent land acts including the Mining Act (1872), the Timber Culture Act (1873), and the Timber and Stone Act (1878) made provision for farming, timber harvest, and mining, but no consideration was made for establishing private ownership for amenity values that did not require cultivation or extraction. If the railroad had engaged in farming, timber harvesting, or mining to establish rights, amenity rents would have been reduced rather than maximized. Moreover, the acreage limitations for each claim (initially 160 acres but subsequently raised to 640 acres) mitigated against railroad ownership of a sufficiently large area to prevent congestion externalities.(7) Had other individuals been able to establish small claims to the Mammoth Hot Springs or to Old Faithful, rents available to the Northern Pacific would have been reduced because a portion of the total rents would have gone to the owners of the specific sights.

The Northern Pacific realized that it would have a far greater chance of controlling access and capturing rents if Yellowstone was managed as a contiguous unit even if under governmental ownership. Indeed, the railroad may well have been the originator of the idea of making Yellowstone a government preserve. The first contemporary record of the suggestion is found in a letter from the Northern Pacific's publicity man, A. R. Nettleton to Hayden on 27 October 1871: "Judge Kelley has made a suggestion which strikes me as being an excellent one, viz. Let Congress pass a bill reserving the Great Geyser Basin as a public park forever - just as it has reserved that far inferior wonder the Yosemite Valley and the big trees. If you approve this, would such a recommendation be appropriate in your final report?" (quoted in Bartlett [1985, 206-7]). The judge, William Darrah Kelley, was a Republican congressman from Pennsylvania and a business associate of Jay Cooke, the principal financier of the Northern Pacific. Just three days after the letter was written, Cooke wrote to his aid in Montana, W. Milner Roberts:

We are delighted to hear such good accounts of the Yellowstone expedition from both ends. Gen. Hancock and Gen. Sheridan have both telegraphed that the report will be a splendid one from the expedition at this end. ... It is proposed by Mr. Hayden in his report to Congress that the Geyser region around Yellowstone Lake shall be set apart by government as park, similar to that of the Great Trees & other reservations in California. Would this conflict with our land grant, or interfere with us in any way? Please give me your views on this subject. It is important to do something speedily, or squatters and claimants will go in there, and we can probably deal much better with the government in any improvements we may desire to make for the benefit of our pleasure travel than with individuals. (quoted in Bartlett [1985, 208])

W. Milner Roberts responded from Helena, Montana, on 21 November 1871: "Your October thirtieth and November sixth rec'd. Geysers outside our grant advise Congressional delegation be in East probably before middle December" (quoted in Bartlett [1985, 208]).

The Northern Pacific's interest in the preserving the amenity values in Yellowstone is clear from this statement from a representative of the company:

We do not want to see the Falls of the Yellowstone driving the looms of a cotton factory, or the great geysers boiling pork for some gigantic packing-house, but in all the native majesty and grandeur in which they appear today, without, as yet, a single trace of that adornment which is desecration, that improvement which is equivalent to ruin, or that utilization which means utter destruction. (quoted in Runte [1990, 23])

Thus the officials of the Northern Pacific recognized the amenity value of Yellowstone and were instrumental in passage of the legislation establishing it as a national park. The railroad made sure Hayden's report included the suggestion that the area be set aside as a government preserve. Bartlett [1985, 208] notes that the railroad hired Nathaniel P. Langford to lobby for the legislation and paid to have a collection of William Jackson's photographs placed on the desk of every member of Congress and for some of Thomas Moran's watercolors to be distributed to the especially influential senators and representatives.(8) The lobbying efforts were successful; the Forty-second Congress passed legislation establishing the park in February of 1872, and on March 1 President Ulysses S. Grant signed it into law. Runte [1979, 91] contends that the lobbying efforts of the Northern Pacific and other railroads with an interest in the region were not driven by "altruism or environmental concern; rather the lines promoted tourism in their quest for greater profits."

TABLE I
Visitations to Yellowstone Park, 1890-1903

 Visitors to Visitors Carried by
Year Yellowstone Northern Pacific

1890 7,808 3,904
1891 7,154 3,577
1892 7,290 3,645
1893 6,154 3,076
1894 3,105 1,635
1895 5,438 2,866
1896 4,659 2,427
1897 10,825 4,872
1898 6,534 2,207
1899 9,579 3,217
1900 8,928 3,785
1901 10,769 2,991
1902 13,433 4,209
1903 13,165 5,611

Source: Haines [1977, II, 478] and various annual reports of the
Northern Pacific Railroad.

In establishing the park, Congress did not provide funding for operations nor did it offer guidance as to how the resource should be managed. According to Haines [1977, I, 212 and 242], Nathaniel P. Langford was appointed the first Superintendent of Yellowstone but was expected to serve without salary. Langford only entered the park twice during his five-year term. Initial appropriations for park operation were not made until 1878 and even then were only for $10,000. There were no rules or regulations posted for tourists who numbered 500 by 1873 and 1000 by 1877.(9)

Under these circumstances the tragedy of the commons resulted, not so much from congestion but from despoliation. In the fall of 1873 an article in a Bozeman, Montana paper described mutilation of the park's "curiosities."(10) Captain William Ludlow led an army expedition into the park in 1875 and reported that during the winter of 1874-75 from 1500 to 2000 elk were slaughtered for their skins within fifteen miles of Mammoth Hot Springs. He also commented on the destruction of certain geyser formations:

The ornamental work about the crater and pools had been broken and defaced in the most prominent places by visitors. ... The visitors prowled about with shovel and ax, chopping and hacking and prying up great pieces of the most ornamental work they could find; women and men alike joined in the most barbarous pastime. (quoted in Hampton [1971, 40-41])

In the 1880s protection of Yellowstone improved with the arrival of the railroad and its potential to capitalize on the amenity rents.(11) Railroad employees monitored visitor activities around geysers, guarded against poaching, and generally protected the environmental qualities that people came to see. Not surprisingly, the Northern Pacific lobbied for congressional funding for these protection efforts. Congress increased its annual appropriations from $15,000 to $40,000 in 1883, including an appropriation for compensating ten assistants who would reside continuously in the park. The Northern Pacific also supported putting the army in charge of enforcing rules and regulations to prevent desecration of the park's resources. The lobbying efforts were successful, and on 17 August 1886 the first troops arrived to establish Fort Yellowstone at Mammoth Hot Springs. For the next thirty years, the army patrolled the park, enforced regulations, designed roads and other improvements and battled fires.

The success of the railroad in cornering a large share of the market for transportation to the park is shown in Table I. Once the Northern Pacific established itself as a main carrier from the East, it carried 46 percent of all visitors to the park between 1890 and 1900. Thereafter, its share declined slightly due to competition from the Chicago, Burlington, and Quincy that arrived in 1903 and the Union Pacific that arrived in 1908. Even after that, however, the three railroads cooperated in offering combined packages to carry passengers from the East and in operating businesses providing internal transportation.

Vertical Integration to Prevent Rent Dissipation

The Northern Pacific was concerned about the successive monopoly problem from the beginning. When the park was established, Secretary of Interior Carl Schurz said that he would not "grant to any person or firm, exclusive privileges" to operate facilities in the park (quoted in Bartlett [1985, 123]). But this stance changed as a result of the railroad's effort to further secure its monopoly position and guard against successive monopolies.(12) The New York Times reported on 16 January 1882 that a syndicate had been formed "of wealthy gentlemen, more or less intimately connected with the Northern Pacific to build a branch tourist's line ... to the heart of Yellowstone National Park, and erect there a large hotel for the accommodation of visitors." The syndicate would enjoy "exclusive privileges in the Park" (quoted in Bartlett [1985, 124]). Congress did not allow the railroad to extend rail service from its terminus into Yellowstone, but long-term exclusive leases were granted for hotel service to the Yellowstone National Park Improvement Company (YNPIC) and for other internal transportation services.

For all intents and purposes, the railroad and YNPIC were fully integrated. At the outset the relationship between the two companies was not clear, although Carrol T. Hobart, one of the founders, had been a section superintendent of the railroad. However, in 1884 the railroad loaned $20,000 in working capital to the receiver of the financially distressed YNPIC, and in 1885 the railroad purchased the property of the defunct concern. Bartlett [1985, 152] notes that most of the investors in the new Yellowstone Park Association incorporated on 15 April 1886 "were directly involved with the Northern Pacific, or were among its heavy investors." As the concessionaire expanded its services over the next several years, the railroad made no attempt "to keep secret its interest in park concessions or its role as a silent partner. Certainly its cooperation with the big park concessionaires was widely known," according to Bartlett [1985, 170]. Over the remainder of the nineteenth century, the Northern Pacific retained firm control of the Yellowstone Park Association (later merged with the Yellowstone National Park Transportation Company), continually contributing capital so that additional properties could be purchased and facilities built.(13) When the Northern Pacific Railroad Company went into receivership for the second time in 1895, Haines [1977, II, 48] says its stock in the Yellowstone Park Association was valued at $372,550, and "the gross passenger receipts from the Yellowstone Park business had averaged $92,357 annually between 1890 and 1896."

By vertically integrating to overcome the successive monopoly problem, the Northern Pacific captured an even larger share of the rents. The dashed line in Figure 1 shows park visitors carried by the Yellowstone National Park Transportation Company (a subsidiary of the Northern Pacific) as a percentage of all those using internal transportation companies. During the early period most visitors to the park availed themselves of public transportation, and the Northern Pacific's subsidiary carried a majority of those people until 1907. Thereafter competition from the Frank J. Haynes' company backed by the Union Pacific chipped away at the internal traffic market. Finally in 1917, the three railroads joined together in a cooperative agreement to help finance a single transportation company with an exclusive franchise. Unfortunately for the railroads, as the solid line in Figure 1 shows, the percentage of visitors using internal transportation companies plummeted with the arrival of automobiles in Yellowstone in 1915.

The railroads also tried to ensconce their monopoly profits from internal services through a series of long-term contracts between concessionaires and the federal government. In 1894, the first of these granted concessionaires up to ten acres at a site and up to twenty acres total. Grants at a single site were increased to twenty acres in 1906. Franchises were extended to twenty years, and franchisees were given the right to mortgage their grants in order to raise capital. At least during the early years, vertical integration along with these franchises and grants gave the Northern Pacific enough control to solve the successive monopoly problem and to reduce rent dissipation through congestion.

Creating a Commons

But troubles for the Northern Pacific and its associates began in the late nineteenth and early twentieth centuries as the federal government increased its regulatory authority over transportation. The beginning of regulatory control of the Northern Pacific and its subsidiaries arose because of competition from the new permanent camps that were springing up in Yellowstone. Visitors were always able to camp on their own, but in 1897 William W. Wylie applied for and obtained permission to operate "semi-permanent camps" at numerous locations in the park. This designation meant that the camps were to be removed after the summer season and hence did not violate the terms of other franchisees. Haines [1977, II, 136] explains that Wylie also offered alternative transportation services, with the total package costing $35, in contrast to the $50 charged by the Yellowstone Park Association.

The railroad responded with a pricing scheme that made its package cheaper than Wylie's. It offered a package arrangement whereby one could purchase rail transportation along with a five and a half day tour of the park for a single price. The package charged more for the transportation to the park, however, if the tour was not purchased. This arrangement scheme reduced the marketability of the Wylie tour and led Wylie to protest the pricing scheme.

In 1905 the Interstate Commerce Commission found: "In other words, the railway company gets $45.00 on a ticket to Gardiner and return, and only $30.50 on a ticket which includes stage transportation through the park, and only $28.50 on a ticket which includes the same stage transportation and entertainment at the hotels of the association."(14) The Commission also charged that the Northern Pacific was engaging in unfair competition:

The defendant railway refuses to make any arrangement with complainant for a joint service or to sell at any place coupons or other tickets for the transportation and entertainment which he provides. ... It is apparent that he is an active competitor of the transportation company and the association and the only inferable motive for any discrimination against him is the desire of the defendant railway to favor the agencies which it controls and in which it is largely interested.(15)

The ICC decided "the Northern Pacific has no right to make one rate for passengers whose journey ends at the terminus of its branch line and a lower rate for passengers who travel beyond that point by the stage of the transportation company or who patronize the hotels of the association."(16) This decision to regulate railroad pricing of tourist services and to allow competition for internal services reduced the monopoly power of the railroad, weakened its position as a residual claimant, and increased the potential for rent dissipation through the tragedy of the commons.

The real death knell for the railroads' monopoly position came on 1 August 1915 when the first private automobiles were allowed into Yellowstone. Initial requests to allow automobiles into the park came in 1902, and pressure increased every year thereafter. Of course, the interior transportation companies and the railroads opposed such action and succeeded in prohibiting automobiles even after they were allowed in other national parks. Finally Congress brought pressure to bear on the Secretary of Interior, and Yellowstone was opened to motorized travel.

The reason for opposition from the railroad and the internal transportation companies is obvious; without complete ownership, they stood to lose rents. However, if the railroad had owned the land itself, it might well have allowed autos into the park. As a landowner and hence residual claimant, the Northern Pacific would have had an incentive to consider the rents associated with automobile entry and could have captured those rents through higher entry fees. In the absence of land-ownership, however, the facility suppliers and the railroad could not capture the rents associated with auto transportation.

Not only did the automobile mean that people could get to the park without the train, it meant that they could take day excursions into Yellowstone and return to the gateway cities for many of their services. The result was a precipitous drop in the percentage of visitors carried by public transportation after 1915 obvious in Figure 1. Haines [1977, II, 273-4] notes that the "motorization of park transportation eliminated the need for many of the intermediate stopping places and led to abandonment of a number of facilities in the Park. ... A further casualty of the reorganization was the boat operation on Lake Yellowstone; transportation across the lake was rendered unprofitable by the automobile."

As the railroad faced increasing competition in providing transportation to and within the park, its interest in Yellowstone waned. Initially automobiles mostly provided local visitors a means of transportation to the park, but Yellowstone's distance from major population centers and a dearth of good roads meant most transcontinental passengers continued to arrive by rail until the 1920s. In 1924 the Northern Pacific still conveyed 35 percent of the total visitors. As more roads were built and cars improved, however, the railroad's share declined dramatically to under 7 percent by 1929 according to Bartlett [1985, 95]. Haines [1977, II, 372] concludes that from then on the Northern Pacific's interest in Yellowstone slowly declined as it "found Yellowstone Park tourism less profitable than it had been in earlier times and soon decided to give up its postwar (World War II) effort to reestablish the former pattern of passenger traffic to the Park. Thus, the hauling of tourists to Gardiner by rail ended with the 1948 season."

With the park gates opened to autos, in the absence of any residual claim on gate fees the potential for a congestion externality arose. The data presented in Figure 2 show the dramatic impact the automobile had on visits to Yellowstone. An F-test on these data shows that the visitor trend prior to 1915 was significantly different from that after, i.e., there is no possibility these two data sets were drawn from the same sample.(17) Keep in mind that this increase in visitors was not just a move to a competitive optimum. Given open access to the park, the previous monopoly position of the railroad and concessionaires tended to promote rent maximization. Opening the park to autos simply created the "tragedy of the commons."(18)

Rent dissipation was not total as long as internal facility suppliers maintained some market power. Hotels, stores, and other facilities were definitely specific assets that could capture a share of the amenity rents from Yellowstone. Moreover, the government had to have a way to ensure that these facilities were supplied to the visitors. To guarantee the concessionaires a return and provide an incentive to make investments, the federal government entered into long-term service contracts with monopoly concessionaires. As noted above, these contracts began with an act in 1897 granting acreage to concessionaires. Bartlett [1985, 179] believes these grants along with exclusive franchises to provide services "greatly aided the concessionaires in raising money." To mitigate the last-period problem which reduces the incentive of franchisees to maintain capital if they are going to lose their franchise, there was continued pressure by the concessionaires for early renewals. "Usually these legal agreements were for twenty years but it was not unusual for a concessionaire to request a renewal before even five years of the current one had elapsed," says Bartlett [1985, 201-2]. For example, a twenty-year franchise of the Yellowstone Park Association signed in 1917 was canceled six years later and a new one granted because park superintendent Albright felt "that a little more protection, by virtue of the extension of the term of the franchise, might be given" (quoted in Bartlett [1985, 202]).

Bartlett [1985, 202] emphasizes the importance of these long-term contracts to both sides of the agreement: "The reasons for these requests are apparent to any business-oriented person. It was easier to obtain loans, and when obtained, at lower interest, the longer the contract had to run. Moreover, both the Park Service and concessionaires became dissatisfied with contract provisions as times changed."

The "apparent" benefits of altering long-term contracts, however, become blurred when the potential for postcontractual opportunism is introduced, especially when one party to the contract is the sovereign government represented by bureaucratic agents as described by Haddock [1994]. On the one hand, because there is no residual claimant on the governmental side of the contract, franchisees may be able to capture a disproportionate share of the rents. According to Bartlett [1985, 202], "Again and again incidents appear indicating Park Service cooperation with the concessionaires that seems to place consideration for these businesses above the public welfare." Indeed the criticism is that monopoly privileges granted by the park service allow the franchisees to capture rents from Yellowstone by charging high prices without maintaining their capital investment and services.

But franchisees facing a sovereign have little recourse if the government decides to act opportunistically. In particular, after World War II when the country was facing inflation, the Park Service would not allow concessionaires to raise prices. The rental rate for rooms was held at depression level prices, leaving concessionaires with little incentive or desire to upgrade facilities. In the absence of a normal contractual regime, concessionaires had little confidence in their ability to capture a return on investment. If the Park Service was putting "businesses above the public welfare" during the first fifty years of Yellowstone's history, its recent emphasis on regulating concessionaire profits and on limiting construction of tourist facilities has placed concessionaire investments in a precarious political position. Bartlett [1985, 376] captures the problem: "The thirty-five or so concessionaires possess an overriding fear: that the Park Service will eliminate them, purchase their facilities, and, after public bidding, lease the facilities on a short-term basis - five years is a commonly mentioned period." Such potential opportunism is hardly conducive to long-term joint production that maximizes rents.

V. CONCLUSION

The policy of the national parks with respect to private interests continues to be controversial. There is continuous political pressure to keep entrance fees low and to allow unrestricted entry. The main private aspect of park operations is concessionaires who have a long-term contract guaranteeing exclusive rights to operate in the parks in return for a fee paid to the government. Many argue that these monopolies should not be allowed and that the fees paid by concessionaires are too low. Understood in the context of the potential for postcontractual opportunism, however, such long-term contracts represent a way of trying to avoid opportunism when vertical integration is not possible and when the land cannot be privately owned. Nonetheless, the sovereign is in a position to appropriate quasi rents by unilaterally changing the terms of the contract.

Indeed the history of Yellowstone is best understood in the contractual context. Pressure to establish Yellowstone emanated from the Northern Pacific Railroad because it was in a position to capture rents by combining its transportation services with the amenity values. To avoid the successive monopoly problem and further secure its monopoly position, it vertically integrated into the supply of internal services, but it could not vertically integrate totally by owning the land. Without owning Yellowstone, the railroad could not completely control entry as it found when automobiles were allowed into the park in 1915. As result, the tragedy of the commons ensued and rents were dissipated instead of maximized.

1. Because the Northern Pacific was the main line to the park, we refer to "the railroad" throughout the paper. We recognize, however, that there were three railroads with access to Yellowstone and that all had some role in the park's operation.

2. This result assumes an elastic supply of inputs necessary to capture the rents, but as Libecap and Johnson [1982] have shown, an upward-sloping supply of inputs can allow some input owners to capture rents.

3. For a more complete discussion of the impact of monopolistic supply of a complementary input and of the successive monopoly problem see Blair and Kaserman [1985].

4. For a more complete discussion of the problems associated with contracting with the sovereign see Haddock [1994].

5. We use the term redistribute rather than appropriate because it is not clear who appropriates rents captured by the sovereign. For example, when the park was opened to automobile traffic, railroad rents went down, but they were not all appropriated. Rather they were partially dissipated through the tragedy of the commons.

6. For a colorful discussion of Yankee Jim's toll road see Whithorn [1989].

7. See Libecap and Johnson [1979] for a discussion of how acreage limitations raised the costs of acquiring land for timber companies.

8. Both Jackson and Moran accompanied early expeditions to the area as photographer and landscape artist, respectively, with the Northern Pacific paying Moran's expedition expenses.

9. See Haines [1977, II, 478].

10. See Hampton [1971, 35] for a complete discussion.

11. The Northern Pacific had been scheduled to complete its transcontinental line in the early 1870s, but a financial panic in 1873 put the railroad into bankruptcy and delayed the line for a decade.

12. For a more complete discussion of rent-seeking activities by providers of resources complementary to a government-owned facility, see Benson and Mitchell [1988].

13. Initially the subsidiary was the Yellowstone National Park Improvement Company that later became the Yellowstone Park Association. However, with the threat of competition by the Yellowstone National Park Transportation Company chartered in 1892, the Northern Pacific merged the companies to restrict competition. Haines [1977, II, Chapter 13] discusses the details of these efforts to cartelize internal transportation.

14. Wylie v. Northern P.R. Co. et al., 11 I. C. C. Rep. 145, 151 (1905).

15. Wylie v. Northern P.R. Co. et al., 11 I. C. C. Rep. 145, 152-3 (1905).

16. Wylie v. Northern P.R. Co. et al., 11 I. C. C. Rep. 145, 154 (1905).

17. The F-statistic is 138.044 and the likelihood ratio is 135.478.

18. For a more complete discussion of the problem of over-exploitation of the park once it became an open access resource in 1915, see Anderson and Hill [1994].

REFERENCES

Alchian, Armen, and Harold Demsetz. "Production, Information Costs, and Economic Organization." American Economic Review, December 1972, 77595.

Anderson, Terry L., and Peter J. Hill. "Rents from Amenity Resources: A Case Study of Yellowstone National Park," in The Political Economy of the American West, edited by Terry L. Anderson and Peter J. Hill. Lanham, Md.: Rowman & Little field Publishers, Inc., 1994, 113-28.

Bartlett, Richard A. Yellowstone, A Wilderness Besieged. Tucson, Ariz.: University of Arizona Press, 1985.

Benson, Bruce L., and Jean M. Mitchell. "Rent Seekers Who Demand Government Production: Bureaucratic Output and the Price of Complements." Public Choice 56(1), 1988, 3-16.

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TERRY L. ANDERSON and PETER J. HILL, Professor, Montana State University, Bozeman, and Professor, Wheaton College, Wheaton, Illinois. Anderson and Hill are Senior Associates of the Political Economy Research Center (PERC), in Bozeman, Montana. We wish to thank Dan Benjamin, Richard Erickson, Ron Johnson, Randy Rucker, and participants in workshops at the University of Chicago, the University of Illinois, Northwestern University, and California Institute of Technology.