Resources Policy 49 (2016) 358367

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

Indigenous economic development in Canada: Confronting

principal-agent and principalprincipal problems to
reduce resource rent dissipation
Aidan R. Vining a, John Richards b,n
a
CNABS Professor of Business and Government Relations, Beedie School of Business, Simon Fraser University, 500 Granville Street, Vancouver, B.C., Canada
b
School of Public Policy, Simon Fraser University, 515 West Hasting Street, Vancouver, BC, Canada V6B 5K3

art ic l e i nf o a b s t r a c t

Article history: In Canada, indigenous communities have strengthened de jure and de facto rights over the last gen-
Received 10 September 2015 eration, thereby enabling them to realize substantial resource rents and other economic development
Received in revised form income. Canadian First Nations (the preferred name for most indigenous communities) have in recent
12 April 2016
years established over 200 economic development corporations, many of them hybrid organizations
Accepted 13 July 2016
partnering with non-Aboriginal resource corporations. We analyze the challenges of institutional design
Available online 26 July 2016
of such hybrids, employing the concept of fractionalized ownership. We discuss principal-agent pro-
Keywords: blems at two levels: First Nation members relative to their leaders, and leaders relative to managers of
First Nations economic development corporations. We also analyze principal-to-principal problems that arise with
Economic development corporations
multiple owners. Using a sample of Ontario First Nation communities, the empirical section analyzes the
Resource rents
impact of own-source revenue (much of it derived from resource projects) on a socio-economic index.
Principal-agent problems
Principalprincipal problems The main conclusion is that incremental own-source revenue improves community socio-economic
Rent dissipation conditions, but only modestly.
& 2016 Elsevier Ltd. All rights reserved.

1. Introduction Even if indigenous groups do avoid or contain dissipation, most

The Canadian government forecasts that over $700 billion
worth of natural resource projects will occur in Canada in the
20162026 decade (Natural Resources Canada, 2016). Indigenous
Canadians1 are now acquiring signicant, although not yet clearly
specied, property rights to a signicant share of the potential
resource rents that should arise from these projects. But, much
global evidence shows that governments and related institutions
nd it difcult to avoid at least partial resource rent dissipation:
the resource curse (Collier, 2010; Frankel, 2010; Corrigan, 2014).
n resources, expertize and capital (Anderson, 1997; Anderson and
Corresponding author.
E-mail addresses: vining@sfu.ca (A.R. Vining), jrichard@sfu.ca (J. Richards).
1
The Canadian indigenous population consists of three groups. First Nations
are those who identify as members of an indigenous tribe, such as Cree, Ojibwa or
Algonquin. Most of these individuals are registered as Indians pursuant to the In-
dian Act, an oft-amended Canadian law dating from 1876. Mtis are those who
identify as descendants of intermarriage in the 18th and 19th centuries between
indigenous women and European men, most of them fur traders or early settlers.
The third group is Inuit; most still reside in Arctic Canada. Aboriginal is generically
used to designate members of any of these peoples in constitutional law (The
Constitution Act 1982, s.35). Indigenous is increasingly used as equivalent to
aboriginal. The term aboriginal or indigenous can also designate communities of
First Nation or Mtis residing on designated reserves.
nd it extremely difcult to ensure that the income captured, ei-
ther as rent accruing to the indigenous government or to some
indigenous members as employment income, benets the in-
digenous community residents overall, rather than their various
agents and a select few (Allard, 2002; Altman, 2004; Graham,
2012).
The process of indigenous resource rent capture often requires
the creation and management of indigenous-controlled economic
development vehicles: economic development corporations
(EDCs). In turn, EDCs or their subsidiaries frequently partner with
non-indigenous corporations, which can provide valuable human
Parker, 2009). The potential benet to indigenous community re-
sidents of resource rents could be substantial if indigenous and
non-indigenous governmental institutions and their economic
organizations can avoid or minimize the various institutional
problems that can contribute to rent dissipation (Grossman and
Hart, 1983; Krepps and Caves, 1994; Dixit, 2002; Young et al.,
2008; Ross, 2015).
After reviewing some contextual history relating to the evolu-
tion of indigenous property rights and economic development, the
paper presents both a theoretical framework and empirical

http://dx.doi.org/10.1016/j.resourpol.2016.07.006
0301-4207/& 2016 Elsevier Ltd. All rights reserved.
 A.R. Vining, J. Richards / Resources Policy 49 (2016) 358367
evidence germane to indigenous resource rents. The theoretical
framework categorizes, species and discusses many of the in-
stitutional principal-agent and principalprincipal problems that
indigenous groups must confront in order to avoid or reduce rent
dissipation (Duncan, 2003). The empirical multivariate analysis
examines some aspects of these institutional challenges in the
context of a sample of 64 First Nation communities in the province
of Ontario. This empirical evidence focuses on the relationship
between perceptions of well being in these communities and as-
pects of their scal situation arising from resource rents and other
own-source revenue.
2. Indigenous property rights and resource rents
2.1. Indigenous property rights
As settler societies occupied indigenous lands and established
new institutions, indigenous peoples in some countries retained
some de jure property rights and management of local govern-
ment. However, in almost all countries, de facto indigenous rights
suffered continuous erosion, at least until the second half of the
20th century. In Canada, Australia, the United States, Scandinavia,
New Zealand, Latin America and elsewhere this erosion is to an
extent being reversed (Cairns, 2000; Wilkins and Lomawaima,
2001; MacKay, 2004; Ortiga, 2004; Sderholm and Svahn, 2015).
In Australia, for example, governments have instituted in-
digenous resource rent payment regimes (royalties) without
necessarily addressing or altering formal property rights (Martin
and Tran-Nam, 2012). In Canada, the judiciary has played a crucial
role in mandating, enforcing, specifying and enhancing these
rights, though the legal scope of these enhanced rights remains
unclear and contested. More effective property rights have en-
abled members of Canadian indigenous communities to partici-
pate in economic development, primarily through the exploitation
of both renewable and non-renewable natural resources situated
on their lands or traditional territories. The potential for signicant
resource-based development was enhanced by the post-2000 rise
in mineral and petroleum prices. Recent resource price declines
have obviously reduced expectations, in First Nation communities
as elsewhere (Sderholm and Svahn, 2015). A more sympathetic
view of indigenous treaty claims by the broader society and an
increase in the indigenous population's demographic weight,
particularly in western Canada, have also contributed to a greater
willingness to share resource rents with indigenous communities.
But much evidence demonstrates that resource rents are a mixed
blessing; they may degenerate into the iconic resource curse
(Cornell and Kalt, 2007; Parlee, 2015).2
Enhanced property rights to natural resources require difcult
decisions and present institutional challenges (Duncan, 2003).
Many indigenous communities are interested in these commercial
ventures only if they involve active indigenous participation in
equity ownership and local employment. Even then, indigenous
communities are often ambivalent about resource development on
their lands because it involves tradeoffs between income and
traditional cultural values. Despite ambivalence, many indigenous
communities in Canada have decided to participate in at least
some natural resource projects within their traditional territories,
2
Provided it is not actually inaccurate, we use the term indigenous com-
munities until the empirical section. Although practice varies and some prefer
aboriginal, indigenous now appears to be the preferred term of most of these
communities. However, where a different terminology is clearly more informative
and/or more accurate we change to the more appropriate terminology. In the
empirical part of the article, we use the term First Nations because none of these
Ontario communities are Mtis or Inuit.
359
if they can get their price. If they do undertake resource devel-
opment, how should they organize it? If they partner with non-
indigenous corporate owners in hybrid organizations, which they
often must do, how should it be done? For example, what are the
likely consequences of the goal conicts that arise between own-
ers? More specically, what should be the institutional structure of
agreements with non-indigenous property right holders, as well as
with those agents who provide complementary managerial and
technical skills? There also arise questions pertaining to relations
between and within indigenous communities. Accountability is-
sues arise between indigenous community members and their
elected governments or appointed managers.
2.2. Indigenous economic development and economic development
corporations
Indigenous economic development corporations (EDCs) are not
typical private corporations maximizing income on behalf of
owners. The Canadian Council for Aboriginal Business (CCAB)
provides a broad denition of EDCs as: community-owned cor-
porations [that] invest in, own and/or manage subsidiary busi-
nesses with the goal of beneting the Aboriginal citizens that they
represent (Canadian Council for Aboriginal Business CCAB, 2015:
3). The denition appropriately (in our view) focuses on the col-
lective ownership aspect of EDCs and their investment in sub-
sidiary businesses, which may in turn invest in hybrid rms having
multiple equity owners.
There is very limited empirical evidence on the behavior or
performance of indigenous EDCs that partner with non-in-
digenous entities. In these hybrid ventures, ownership is formally
shared with non-indigenous actors. Recently, a government-ap-
pointed group of indigenous leaders released a report that sum-
marized these challenges as follows:
even with revenues owing to communities, agreements
between Aboriginal groups and the private sector or other levels of
government are no guarantee that a community will reach eco-
nomic prosperity and self-sufciency. There are many reasons for
this, including: resource opportunities creating dependence on a
single, and often volatile, revenue stream; management systems
being overwhelmed by a large inux of revenues; and chronic
underfunding of many services and programs placing pressure on
Aboriginal governments and their decision-making processes
(National Aboriginal Economic Development Board (NAEDB),
2015: 4).
Below we shed some empirical light on the issues by analyzing
the nancial reports of 64 First Nation communities in the pro-
vince of Ontario, Canada. Our premise is that both efcient in-
stitutional and organizational design and the effective structuring
of organizational governance mechanisms are likely to be as im-
portant to efcient and equitable resource rent extraction as are
cost-effective technology, incentive-compatible taxation and ef-
fective national legal and political governance (McGinnis, 2016).
3. Fractionalized property rights and hybrid organizations
3.1. Hybrids
When indigenous communities partner with other corporate
entities, public or private, they create a hybrid organization.
Hybrids typically have characteristics of both private sector orga-
nizations that pursue prot and public or quasi-public organiza-
tions that pursue some broader collective goal. Over the last two
decades, hybrids as an organizational class have experienced ex-
plosive growth around the world (Hodge et al., 2011). Hybrids
include social entrepreneurship organizations (formally for-
360 A.R. Vining, J. Richards / Resources Policy 49 (2016) 358367
prot, but also emphasizing social goals), social enterprises (for-
mally for-prot but subject to various constraints on protability),
mixed enterprises (rms with both public and private share-
holding owners), public-private partnerships (used for infra-
structure projects; nominally under public ownership, but orga-
nized through long-term contracts with private sector rms),
government-sponsored enterprises and other variants that do not
easily t in any of these categories (Perry and Rainey, 1988). Hy-
brids that include indigenous owners can fall within any of these
categories, although in Canada most hybrids for the purpose of
indigenous economic development are with private sector (prot-
seeking) rms, as far as we are aware. All hybrids are susceptible to
some tension between owners, whether over fundamental goals,
the direction of organizational strategy, or over the distribution of
any surplus valued by more than one owner. Tension is likely to be
more intense the larger the resource rents at stake. Tension is also
likely to vary to the extent that they suffer from fractionalized
property rights, as we describe next.
3.2. Six dimensions of fractionalization
We analyze hybrids generally, and more specically economic
development hybrids with some level of indigenous ownership,
using a fractionalized property rights (FPR) framework (Vining and
Weimer, 2016). The extent of FPR is important because, for reasons
we have introduced above and explain further below, some frac-
tionalization is inevitable in hybrids, exacerbating both principal-
agent and principalprincipal challenges. Six important property
right dimensions are:

The degree of ownership fragmentation. The more widely dis-
persed is ownership, the higher are transaction costs of forming
a voting majority able to adjust the current strategy and the
higher are the costs of effectively monitoring the agents who
manage the hybrid.

The clarity of ownership allocations. Unclear allocations invite
dissipation of potential organizational benets in opportunistic
bargaining among principals (Williamson, 1993).

The transaction costs involved in alienating ownership. These
costs differ widely across property rights systems. In many de-
veloped countries the transaction costs associated with selling
individual property rights are relatively low. Even here, though,
institutional factors can raise transaction costs to a level that
precludes otherwise mutually benecial transfers.

The security from trespass of ownership rights. Lack of security
attenuates the value of any de jure property rights. Very high
costs of enforcing security, for example, can completely negate
the value of ownership.

Credibility of survival over time of ownership rights. Lower
credibility, especially stemming from predatory government or
quasi-government institutions, lowers the present value of any
asset.

The extent of owner and managerial autonomy. For assets to be
valuable, owners require a high measure of autonomy (from
external actors such as political parties or factions). As well,
managers need operational autonomy, but managerial autono-
my inevitably introduces principal-agent problems owing
from information asymmetry.
Hybrids are particularly prone to organizational weaknesses
relating to several of these six dimensions, starting with the reality
that all hybrids involve fragmented ownership (Vining and Wei-
mer, 2016).
3.3. Fractionalized property rights and indigenous EDCs
Why do indigenous communities often opt for hybrid EDCs?
Given ambiguity around the scope of indigenous property rights, it
is virtually impossible for indigenous communities to write rea-
sonably complete contracts accounting for all present and future
contingencies. Many non-indigenous resource developers similarly
nd it impractical to write detailed contracts stipulating rights and
obligations that provide sufcient certainty for them to act as sole
owners and make xed resource rent payments under contract.
This reality encourages the use of hybrid ownership arrangements.
Additionally, an ownership share provides indigenous communities
with a seat at the table when major policy decisions relating to
resource exploitation are made. This gives them both the exibility
to revise goals and strategies as events evolve and to enhance their
management capabilities (an important positive externality).
Indigenous EDCs or their subsidiaries frequently employ the
hybrid ownership form. Not surprisingly, they encounter both
generic FPR issues and some that are more specic to them. Again
using the six dimensions, these issues are:

Ownership fragmentation. Indigenous hybrids can involve large
numbers of owners with divergent goals (Vining et al., 2014). They
can also involve different indigenous communities with different
goals and different property right regimes. In one hybrid created
to enable construction of a pipeline, for example, there are more
than a dozen indigenous groups with an ownership stake.3

Clarity of the various ownership allocations. In indigenous hy-
brids, clarity can be obscured by prolonged litigation over in-
terpretation of treaty and ownership rights. While courts have
expanded treaty rights, the legal and practical extent of in-
digenous property rights in Canada remains unclear (Eyford,
2015). The courts have laid out some broad principles (such as
the right to be consulted over projects on lands claimed). They
have usually been unwilling to allocate freehold title over
specic parcels of land or to award a precise share of the yield
from particular resources.4

Transaction costs involved in alienating ownership. Among in-
digenous societies, there are typically many external (imposed
by national governments) and internal (imposed by indigenous
cultures) constraints on alienating rights, which raise the per-
ceived cost of hybrid activities that encumber treaty rights.
Members of indigenous communities are often mistrustful of
non-indigenous institutions, whether public or private, raising
inter-owner conict. Where indigenous acquiescence is neces-
sary for resource development, its cost of withdrawing from a
hybrid is the opportunity cost of foregone resource rent, the
benet is the existence value of an untrammeled treaty right,
which may loom larger. For non-indigenous owners, the op-
portunity cost of withdrawal is their share of forgone resource
rents; the benet of alienation is the potential income from sale
of their property right to another, probably non-indigenous,
developer. If the sale is due to conict with one or more
3
The First Nations Pacic Trail Pipeline Group Limited Partnership (FNPTPGLP,
2015) includes 16 First Nations (whose traditional territories are located along the
transportation corridor in northern British Columbia) and energy resource
corporations.
4
In contrast, in the U.S., the Boldt (1974) decision is an example of courts
dening a precise treaty right bearing on resource exploitation. The decision
awarded 50 percent of the commercial salmon harvest in the State of Washington
to the indigenous population. In Canada, the Supreme Court's Sparrow (1990) de-
cision established that Aboriginal shing rights exist, but refrained from specifying
what they are. The Tsilhqotin (2014) decision is a recent exception. It is the rst
modern Canadian decision to settle a First Nation treaty claim by awarding col-
lective title, including all resource rights, over a specied territory to a particular
First Nation.
 A.R. Vining, J. Richards / Resources Policy 49 (2016) 358367
indigenous owners (with at least de facto veto power), the
market value may be low.

Security from trespass of ownership rights. As already de-
scribed, indigenous de jure security from trespass was fre-
quently undermined historically by de facto inability to enforce
it. In recent decades, the courts in Canada have both strength-
ened de jure indigenous treaty rights and shown willingness to
enforce them. However, the extent of these de jure and de facto
property rights especially over traditional lands occupied prior
to European contact remains uncertain. The negotiation and
interpretation of contracts around EDCs is in the process of
creating the relevant legal precedents.

Credibility of survival over time of ownership rights. The cred-
ibility of collective ownership persistence among Canadian in-
digenous communities is high. They are very unlikely to relin-
quish treaty rights; they may however forego them for a pre-
dened period via, for example, leasing.

Owner and managerial autonomy. Conict between indigenous
and non-indigenous principals raises the possibility of either
managerial dissonance or managerial opportunistic behavior.
This may lead to a narrowing of goals (the emergence of a
dominant logic) or to organizational dysfunction and failure.
In sum, the use of hybrids involves indigenous legal entities in
corporate governance. All hybrids involve relatively complex in-
stitutional design issues starting with the problem of multiple
owners with differing interests. A number of studies have ex-
amined corporate governance issues in the context of sole in-
digenous ownership of resource property rights (Lin et al., 2015).
However, the unique mix of governance challenges of hybrids in-
volving some indigenous ownership has not been addressed
(Bobroff, 2001).
4. Principal-agent and principalprincipal challenges
For analytic convenience, we partition hybrid governance
challenges into principal-agent issues and principalprincipal is-
sues. It is widely recognized that ownership fragmentation in-
herent to the hybrid form exacerbates principal-agent problems.
They are a ubiquitous institutional decision problem for all orga-
nizations with separation of ownership and (agent or managerial)
control (Grossman and Hart, 1983; Dixit, 2002). Furthermore, to
the extent that property right owners other than a single in-
digenous group are involved, fractionalization exacerbates prin-
cipalprincipal problems. As soon as there are at least two prop-
erty right owners with distinct interests, whether those rights are
de jure or de facto (La Porta et al., 2000; Young et al., 2008; Ward
and Filatotchev, 2010), these issues arise. They arise even in hy-
brids with no non-indigenous owners, but multiple distinct in-
digenous ownership groups.
Dealing with complex institutional design issues involving
multiple principals and agents is always complex, based on ne-
gotiation costs alone. A preliminary illustration is the case of the
Tsil Kza Koh First Nation in northern British Columbia. The nation
has the opportunity to participate in a pipeline project that would
cross its traditional territory (Stanley, 2015). More than half of the
members of the First Nation do not reside on the reserve and this
majority has mostly voted for council leaders who favor partici-
pation, partly on the basis of an expectation of receiving individual
payments. If these non-residents achieve standing, they would
constitute relevant principals.5 Reserve residents are, of course,
5
The 1876 Indian Act is the basic legislation governing indigenous governance
361
principals and the majority of them have opposed participation in
the project. Recently, the Tsil Kza Koh joined a limited partnership
with other First Nations and energy resource corporations pro-
posing to build a major pipeline transporting natural gas to a Pa-
cic coast port (First Nations Pacic Trail Pipeline Group Limited
Partnership (FNPTPGLP), 2015).
Appropriate design can mitigate problems arising from FPR,
including those arising in hybrid EDCs, but owners and managers
must recognize and address the various consequences.6 Before
addressing the consequences in more detail, we identify and
briey discuss the various dimensions of both the principal-agent
and principalprincipal problems.
4.1. Principal-agent challenges
Before contact with Europeans, many indigenous peoples faced
and successfully resolved principal-agent and principalprincipal
challenges in managing natural resources (Ostrom, 1990; Araral,
2009). Indigenous salmon harvesting in the Pacic Northwest
documents one well-researched example. Given their life cycle,
which entails returning to spawn in the same location in which
they hatched, harvesting salmon can be undertaken with minimal
effort. Hence, salmon are prone to over-exploitation in the absence
of effective property rights that control and allocate harvesting
rights. Historically, indigenous peoples in the Pacic Northwest
successfully managed collective ownership of riverine sheries.
Only when settlers using open-boat technologies greatly expanded
harvesting effort in the 20th century did a serious threat of stock
depletion arise (Schwindt et al., 2000). More generally, most re-
searchers have concluded that successful resolution of the tragedy
of the commons in communal societies with collectively owned
resources requires meeting several conditions, including a limited
number of members with enforceable barriers against intruders,
repeated interaction among members, and means to monitor and
control individual use. In effect, these conditions imply the ex-
istence of a government, bound by custom if not more elaborate
constraints. This is not to say that indigenous communities always
have utilized collective ownership to deal with property. Historical
evidence suggests ownership forms varied widely, based on a
variety of practical factors (Hodge, 1910; Steward, 1938; Anderson,
1995; Rodriguez et al., 2006).
Indigenous management of (especially non-renewable) natural
resource projects that requires extensive capital investment poses
problems at two levels. The rst level concerns the member-to-
government relationship that has always existed for indigenous
societies. As agents of the members, leaders are charged with
general governance, management and leadership. This principal-
agent challenge is not inherently different from that between any
collectivity of citizens and their government. Various factors can
exacerbate or mitigate the challenge. In developing countries,
many of which have weak formal governance institutions, large
natural resource rents have exacerbated the problem of
(footnote continued)
in Canada. Section 77(1) restricts voting in elections to members who are ordi-
narily resident on the reserve. The major court decision on voter eligibility is
Corbiere (1999), which decided a conict between off-reserve and on-reserve
members of a First Nation in Quebec. The trial court ruled that section 77(1) vio-
lated the equality section of the Canadian Charter of Rights and Freedoms. The
Supreme Court of Canada upheld this decision. However, Corbiere contains many
qualications and standing of off-reserve members remains unclear.
6
Solutions to fractional owner conict with differing goals are necessarily
complex because of the law of requisite variety which states variety absorbs
variety, the minimum number of states necessary for a controller to control a
system of a given number of states (Ashby, 1956). In the institutional design
context, we can summarize this law as: more complex organizational design pro-
blems require more complex design responses, that is, with design elements at
least equal to the problem dimensions.
362 A.R. Vining, J. Richards / Resources Policy 49 (2016) 358367
governance, by disrupting traditional tribal or feudal conventions
and edgling democratic institutions. Resource rents have often
been dissipated. It is less clear exactly why.
Many economists focus on the crowding out of more pro-
ductive activities that rent-seeking activity encourages (Frankel,
2010; Sachs and Warner, 2001). In contrast, political economists
focus on the variability of institutional quality (North, 1990; Olson,
1993; Minnis, 2006; Collier, 2010; Ross, 2015). When governance
quality is low, governments nominally acting on behalf of citizens
are likely to dissipate resource benets. Dissipation can take many
forms. In the absence of nancial transparency and accountability
and absence of an independent press, access to large resource
rents enables politicians to transform their role from agents into
principals able to exercise discretionary control over resource
income. They may use the income for personal benet; they may
develop multiple forms of patronage, including vote buying at
times of elections and offering low-effort public sector employ-
ment or other perks in exchange for political support. Further-
more, institutional quality is endogenous: all else equal, the ex-
istence of large resource rents exacerbates conict between com-
peting elites, usually with collateral damage to governance quality.
Among indigenous communities, infusion of resource revenues
potentially brings substantial positive benets. But the benets
may be offset by various principal-agent problems, (Duncan,
2003). While rst level principal-agent problems have not been
extensively studied, there are some sample surveys (Quesnel,
2012) and extended case studies (Allard, 2002; Helin, 2006; Gra-
ham, 2012) that address patronage in First Nations governance and
conclude that it is a substantial problem.
Second-level principal-agent challenges arise from the gov-
ernment-to-manager relationship, that between chiefs and
councils on one hand and those managing EDCs. Again, all gov-
ernments experience this government-to-manager problem when
managing commercial assets via state-owned enterprises (Vining
and Boardman, 1992) or other corporatized entities (Vining,
Laurin, Weimer, 2015). In most cases, chiefs and councils are the
ones appointing and supervising economic development man-
agers who, nonetheless, enjoy varying degrees of autonomy (Curry
et al., 2009). Fundamentally, autonomy ows from asymmetric
information: managers usually have more knowledge and ex-
pertize about the enterprise than do principals. Unless this was the
case, there would be minimal efciency gains from employing
them. However, the autonomy creates the potential for self-ser-
ving managerial behavior and conict with principals. Most pro-
fessional and managerial organizations able to offer credible ad-
vice to indigenous local governments are located in urban centers.
This places geographically remote communities at a disadvantage.
The principal-agent problem has been extensively analyzed with
respect to both public agencies and private corporations (Jensen
and Meckling, 1976; Krepps and Caves, 1994; Sappington, 1991;
Dixit, 2002). The evidence suggests that getting institutional de-
sign right is just as important for indigenous peoples and their
organizations as for others (Anderson, 1997; Anderson and Parker,
2009).
4.2. Principalprincipal challenges
Principalprincipal problems arise wherever there are multiple
owners of an asset. They tend to be more severe when the various
owners have divergent goals, and even more so when some
owners goals are not related to prot maximization (Young et al.,
2008).
Recent Canadian parliamentary hearings illustrate a principal
principal issue regarding institutional arrangements for nancing
reserve infrastructure, such as housing and schools (Senate of
Canada, 2015). The hearings involved senior ofcials of nancial
institutions with long experience participating in indigenous EDC
hybrids created to implement public-private partnerships.7 They
noted that, particularly in remote reserves, infrastructure tended
to degrade more quickly than expected. They suggested this was
partly due to lack of clarity of ownership obligations about the
responsibility of EDCs for maintenance. Financing participants
perceive this as fostering opportunistic maintenance behavior. The
witnesses argued private investors are unwilling to provide -
nancing unless they can transfer this risk to the federal govern-
ment. But, for obvious reasons the federal government is reluctant
to accept the risk.
Where the indigenous community and a private sector princi-
pal do demonstrate a shared common goal, it is normally prot
maximization. Albeit some private sector actors in some contexts
may also pursue corporate social responsibility or related goals,
their goal is normally prot. In some cases, indigenous commu-
nities may be quite willing to take a prot share and in others a
government may simply mandate it. But, in the absence of this, the
potential strategies of EDCs inevitably are more variable. In turn,
the greater is the potential for non-prot-maximizing strategies
the greater is the scope for principalprincipal conict.
Even with shared consensus on prot, conict can still occur,
most obviously over the allocation of the joint prot between
owners (and/or between the owners and managers). More subtly,
owners may experience conict over how hard to push agents on
cost-minimization. This may arise with afrmative action pro-
grams to employ indigenous personnel. The parties may also have
difculty in maintaining agreements over time. The principal on
the indigenous side is a government chosen by election or custom-
based rules. Like all governments, indigenous governments are
intrinsically political: majority sentiment among voters or re-
sidents may shift and today's government is usually not able to
credibly commit the decisions of a future government.
4.3. How hybrid organization managers try to resolve cognitive
dissonance
Because direct ownership negotiation is often impractical, both
members and general governments mostly rely on hybrid man-
agers to resolve goal tension. If they do not have discretion to do
so, the hybrid may dissolve quickly under the weight of the un-
resolved tension (Boardman and Vining, 2012). In attempting to
resolve divergent owner goals, managers face cognitive dissonance
(Festinger, 1957), that is, inconsistency between two cognitions,
or between behavior and some cognition (Maertz et al., 2009: 68).
The management literature labels this problem conicting logics.
Most organizations do resolve dissonance because it is an un-
pleasant cognitive state leading to dysfunctional consequences
(Wicklund and Brehm, 1976). The most common resolution is
adoption of a dominant logic (Selznick, 1949; Lounsbury, 2007;
Vining and Weimer, 2016). More subtly, managers can decouple
by symbolically endorsing one of the two logics, while actually
implementing the other (Townley, 2002). In hybrids with highly
divergent owner goals, managers are on a knife-edge. Throwing
up one's hands is a resolution that could represent either (Saz-
Carranza and Longo, 2012). However, these solutions may not sa-
tisfy either principal over time. If the resolution fails, so may the
hybrid.
Joint prot maximization is likely to emerge as the dominant
logic least prone to failure because it will nearly always suit the
non-indigenous owners and is often acceptable to indigenous
7
The Assembly of First Nations (AFN) is the peak association representing
Canadian First Nations. The AFN (2012), in advising individual First Nations on
alternate institutional models for structuring hybrid arrangements for construction
and management, has published a survey of alternate models.
 A.R. Vining, J. Richards / Resources Policy 49 (2016) 358367 363

owners. Even if some indigenous owners rank other outcomes

above protability, they can decide to take their prot share and
use it to pursue their preferred goal, such as indigenous employ-
ment. While this may be the most practical solution, agreeing to
accept a second-best goal creates the potential for principal-agent
issues, as organizational effort goes into converting prot to
other purposes.
Our purpose has been to describe a theoretical framework with
broad applicability to indigenous resource rent issues. The next
section discusses evidence on the ability of specic indigenous
communities to benet from economic development activities,
including resource rents.

5. Evidence on the impact of own-source revenue on com-

munity well-being of Ontario First Nation communities

We analyze evidence from a sample of 64 First Nation commu- Fig. 1. Average Community Well-Being Index, by Population Intervals, 2011
nities in the province of Ontario. The well being of individuals in (n 64).
these communities obviously depends on many factors apart from
resource or related rents. We are primarily interested in whether
income derived from economic development activities is related to
community well being, measured by a Community Well-Being
(CWB) index. Among these communities, in the 2013/14 scal year,
this income source is important. It represents, on average, approxi-
mately a third of total income recorded among the sample of First
Nation governments. As detailed below, we construct and use a
measure of per capita own-source revenue8 as a normalized mea-
sure of the income each community receives from these economic
activities. Multiple regressions examine whether there is a statisti-
cally signicant relationship between this income and well being of
the relevant First Nation residents, measured by the CWB index. If
higher well-being is associated with less rent dissipation, this may
reect better resolution of principal-agent and principalprincipal
problems accompanying economic development activity. We include
two other variables addressing other socio-demographic factors that
may also be associated with variations in the level of community well
being. A number of analysts argue that relatively small population
size is associated with lower quality of local governance (Andrews Fig. 2. Community Well-Being Index, 2011, by Community Well-Being Index, 2006
and Boyne, 2009; Found, 2012). The populations of all sample First (n 50).
Nation communities are small relative to even small non-Aboriginal
rural municipalities, and minimum efcient scale (MES) problems statements led to comply with the First Nations Financial
arise (Graham, 2012). If scale economies do matter across the sample, Transparency Act (FNFTA). Prior to passage of the FNFTA in 2013,
one would expect larger First Nation communities, holding other these data were not readily available.9 The statements do not use
factors constant, to achieve better governance and higher well being. standard accounting protocols to categorize revenue and ex-
Fig. 1 summarizes average values of the Community Well-Being
penditures. To isolate revenue arising from economic development
(CWB) Index for the sample, by population intervals. Fig. 1 suggests
activities, Richards and Krass allocate items in the audited state-
an MES effect at around a thousand members.
ments to one of three categories:
It may also be the case that community well being involves
signicant path dependency (Haeder, 2012). We might expect

Grants from Indigenous and Northern Affairs Canada (INAC) (38
path dependency for a variety of reasons unrelated to either
percent of total): INAC is the federal department responsible for
community population or the level of own-source revenue. The
disbursing grants to fund core governance and most basic ser-
trend line of 2011 CWB values regressed on 2006 values approx-
vices (education and social assistance).
imates a 45 degree ray from the origin and deviations from it are

Grants from other government agencies and minor sources (29
relatively small. This suggests the probable importance of this
percent of total): This includes grants from Canada Mortgage
dynamic in a multivariate regression analysis (see Fig. 2).
and Housing Corporation and Health Canada.

Own-source revenue (33 percent of total): This category covers
5.1. Major data sources: audited nancial statements and Canadian
all revenue arising from EDCs and other related sources, in-
census
cluding various fees on non-indigenous third parties. EDC rev-
enues include proceeds from gambling casinos, fully owned
The nancial data we use are derived from audited nancial
EDCs, and resource revenue derived from impact and benet
agreements (IBAs). IBAs arise from negotiations between First
8
Among the 64 First Nations in the sample we have observations on per capita
own-source revenue for 57. Among the 57, the mean is $10,600, with standard
9
deviation $8,700. Among the subset of 50 First Nations with observations on all The statements are available on line at the INAC site (AANDC, 2014). For
variables of interest, Table 2 provides descriptive statistics. further detail on these statements, see Richards and Krass (2015).
364 A.R. Vining, J. Richards / Resources Policy 49 (2016) 358367
Table 1
Descriptive statistics.
Own-source revenue, by First Nations a. (n 50)
Per capita own-source revenue, by First Nation residents b. (n 22944)
On-reserve population, 2011 c.
CWB index, 2006
CWB index, 2011
Notes:
a. The distribution includes those First Nations in Ontario for which observations exist on all variables used in regressions. The total includes 50 of 99 Ontario First Nations
reporting under the FNFTA. The nancial data refer to the 2013/14 scal year.
b. The cumulative distribution, from which percentiles are calculated, is based on the following assumption: own-source revenue accruing to a particular First Nation is
distributed equally among residents of the relevant First Nation. Per capita calculations rely on 2011 census on-reserve population estimates.
c. The total 2011 census population of these 50 communities is 22,944. There may be errors in these counts, due to under-reporting and incorrect attribution of residence.
Nation councils and resource developers seeking First Nation
agreement to pursue resource projects that legally encumber
traditional lands.
Much of the revenue in the own-source category is gross rev-
enue, covering cost of goods and services delivered by EDCs, rather
than net revenue to First Nation governments after subtracting
cost of producing the goods and services. If rent dissipation is
occurring, it could arise in a number of forms. Examples might be
EDCs incurring unnecessarily high employment in producing
goods and services. While reducing potential net income, such
policies may nonetheless increase employment income of First
Nation residents, which in turn may be reected in CWB values. If
principal-agent or principalprincipal problems are serious
though, the community benet from net income may be minor.
Unfortunately, the audited statements do not permit consideration
of these dynamics beyond an examination of the strength of the
relationship between own-source income and the CWB index.
Inspired by the United Nations Human Development Index
(United Nations (UNDP), 2016), the Community Well-Being (CWB)
index is constructed by Indigenous and Northern Affairs Canada
following each census (Indigenous and Northern Affairs Canada
(INAC), 2016). Both indices measure key socio-economic variables
of political jurisdictions in terms of a weighted sum of the selected
key variable outcomes. For our purposes, this kind of index is more
useful and informative than one based on subjective well-being or
happiness. The CWB index consists of four equally weighted
components and has a range of 0100, as does each of the
components:

Per capita income: this component transforms average per ca-
pita income, as measured by the census, into log form and ex-
presses the result as a fraction of the upper bound of the log of C
$40,000.

Education level: two thirds of this component is the fraction of
the population, ages 20 and older, with at least high school
completion; the other third is the fraction of the population,
ages 25 and older, with a university degree at the Bachelor's
level or higher.

Housing quality: two equally weighted elements, the fraction of
the population living in a dwelling with fewer than one person
per room, and the fraction of the housing not in need of major
repair.

Labor force activity: two equally weighted component, the
fraction ages 2065 engaged in the labor market at the time of
the census whether employed or not, and the fraction ages 20
65 actually employed.
From the 2011 census, we can determine CWB index values and
resident on-reserve populations for 64 Ontario First Nations. For a
Average 10th percentile 50th percentile (median) 90th percentile
$3.93 million $1.24 million $2.76 million $7.10 million
$10500 $2900 $7400 $15300
459 167 364 875
60.1 49.0 60.5 70.0
60.4 50.0 61.0 71.1
subset of 50 First Nations, we can generate observations on all
variables of interest: namely, per capita own-source revenue, re-
sident on-reserve total population and CWB index values for both
2006 and for 2011. Table 1 provides summary statistics on these
variables (based on the 50 First Nation sample); Table 2 denes
and describes the variables used in the regressions that follow.10
Among the 50 First Nations, own-source revenue comprises a third
of total reported revenues. There is considerable variation across
First Nations in per capita own-source revenue: the 90th/10th
percentile ratio exceeds ve to one. Finally, for a subset of 32 First
Nations, we can generate observations on the individual compo-
nents of the CWB index, although only for 2011.
5.2. Methodology and results
We initially run a regression using 2011 CWB index values
(cwb.2011), for the available 64 observations (see Table 3). Re-
gression 1 in Table 3 includes own-source revenue (ownsourcerev)
for all communities with dened estimates, an index for those
communities without available own-source revenue data (own-
sourcerev.na), and band population (pop). Rather than treating
population as a continuous variable, regression 2 uses a dichot-
omous index variable (popmes) with 1000 as the break point. In
regression 2, all regressors are statistically signicant, and the
adjusted R2, while low, is somewhat higher than in regression 1.
Ceteris paribus, the estimated difference between the CWB value
of over 1000 population communities versus those with under
1000 is 8.3 CWB units. Given the distribution of CWB index values
among the 64 sample First Nations, this is almost one standard
deviation.11 The impact of own-source revenue is substantially
more modest. For example, the forecast change to the 2011 CWB
index of a First Nation that increased its per capita own-source
revenue from the 10th percentile to the median (an increase of
$4800, from $3100 to $7900) would be 1.3 units, somewhat less
than one sixth of the standard deviation.12 Given the coefcient on
the observations with no estimated per capita own-source rev-
enue, their average actual own-source revenues may be large.13
Regressions 1 and 2 imply that residents of First Nation
10
Normalization uses 2011 census on-reserve population estimates. The total
census population of these 50 communities is 23,000. There may be important
errors in these counts, due to under-reporting and incorrect attribution of
residence.
11
The coefcient is 8.3; the standard deviation of the CWB index values is 8.5
(n 64).
12
The illustrative calculations are based on statistics dened for the 64 ob-
servation subset used in regressions 1 and 2, rather than the 50 observation subset
reported in Table 1.
13
If the incremental impact of $1 of average per capita own-source revenue on
the CWB index is 2.774E  4, to generate a coefcient of 7.507 among the seven First
Nations with no estimate of own-source revenue, the average per capita own-
source revenue among them must be $27,100 ( 7.507/2.774E  4).
 A.R. Vining, J. Richards / Resources Policy 49 (2016) 358367 365

Table 2
Denition and description of regression variables.

Label Denition Description

Dependent variables
cwb.2011 Community well-being index, 2011 Value accorded to each First Nation in CWB index, based on 2011 census data (National Household
Survey)
dcwb Change in community well-being index Difference between 2011 and 2006 CWB index values

Independent variables
cwb.2006 Community well-being index, 2006 Value accorded to each First Nation in CWB index, based on 2006 census data (20% long form
sample)
ownsourcerev Per capita own-source revenue dollar estimate calculated from audited statements in case of available data; 0: data not available
ownsourcerev.na Per capita own-source revenue not available Index variable (1: data not available; 0: data available)
pop total population of First Nation community Number of residents living on reserve, based on 2011 National Household Survey
popmes Population of First Nation community exceeds Index variable (1: population exceeds 1000; 0: otherwise)
1000

Table 3 Table 4
Regression of per capita own-source revenue on Community Well-Being (CWB) Regression analysis of impact of per capita
Index Level, 2011. own-source revenue on change in Commu-
nity Well-Being Index, 2006 to 2011.
Regression (1) (2) (3)
Regression (4)
** **
ownsourcerev 3.038E  4 2.774E  4 6.330E 5
(2.28) (2.22) (1.10) Ownsourcerev 1.010E  5
(0.17)

ownsourcerev.na 7.981** 7.507**

(2.15) (2.11) Pop  3.578E  3**
(2.09)

pop 4.162E  3
Constant 1.796
(1.43)
(1.43) R2
0.10
Adjusted R2 0.06
Number of observations 50
popmes 8.348*  0.784
(1.96) (0.37)

cwb.2006 0.911***
Table 5
(15.09)
Partial correlation matrix of per capita own-source revenue and components of
Community Well-Being Index, 2011.
constant 55.922*** 57.635*** 4.972
(21.98) (32.39) (1.38) Per capita Education Housing Labor mar- Per capita
R2 0.11 0.13 0.84 income ket activity own-source
Adjusted R2 0.06 0.09 0.83 revenue
number of observations 64 64 50
Per capita 1.000
Legend for regressions 14: income
* Education 0.790 1.000
Signicant at 0.1.
** Housing 0.675 0.680 1.000
Signicant at 0.05.
*** Labor market 0.547 0.488 0.333 1.000
Signicant at 0.01.
activity
Per capita own- -0.077 -0.238 0.086 -0.158 1.000
communities realize modest benets from incremental income source
arising from economic development activity. However, the re- revenue
gressions explain only a small percentage of the variance in CWB
among the 64 First Nations. Regression 3 adds the 2006 CWB in-
incorporated in 2006 CWB values and the coefcient of popmes is,
dex (cwb.2006). It strongly suggests the importance of path de-
as expected, statistically insignicant.
pendency over the relatively short ve-year interval between the An alterative specication is to regress changes in CWB (dcwb)
two censuses. While the evidence is informal, the value of own-
between the 2006 and 2011 censuses on the available variables
source revenue has grown over the last decade (CCAB, 2015). One
(see Table 4). This gets at the question whether communities with
might expect that large per capita own-source revenues this
large per capita own-source revenue this decade experience a
decade would have an impact on 2011 CWB values, independent of
larger increase in community well being than those with more
its impact on 2006 values. Regression 3 does not nd evidence of
modest own-source revenue. The answer appears to be no. The
it. The own-source revenue coefcient remains positive, but is
relevant coefcient in regression 4 is positive but very small and
roughly one quarter the magnitude of its value in regression 2 and
statistically insignicant. The only statistically signicant result is
is statistically insignicant.14 The MES effect is presumably
some catch-up by communities with small populations: the

14
One potential reason for the lack of signicance of own-source revenue in
regression 3 is that communities with high 2006 CWB scores have dis- (footnote continued)
proportionately large per capita own-source revenue. There is little evidence of such multi-colinearity, however: the partial correlation is low (r 0.12).
366 A.R. Vining, J. Richards / Resources Policy 49 (2016) 358367
smaller the population, the larger the expected change in CWB.
Table 5 shows the partial correlation matrix of per capita own-
source revenue and the components of the 2011 CWB index
among those 32 First Nations with available data. It illustrates the
generally high correlation among the CWB components and the
low correlation of own-source revenue with any of the CWB
components. One might expect a positive relationship between
per capita own-source revenue and labor force activity. However,
that correlation is low and negative.
6. Policy discussion and conclusion
The paper presents both a theoretical framework and some
empirical evidence germane to indigenous-led economic devel-
opment activity in the resource sector and elsewhere.
The overall conclusion from the empirical evidence is that in-
cremental own-source revenue is associated with somewhat bet-
ter socio-economic outcomes (regressions 1 and 2). Hence, the
institutional problems associated with expansion of economic
development activities do not appear to entirely dissipate social
benets to the overall community. But the expected benet, as
measured by the CWB index, is modest. Above, based on the re-
gression 2 specication, we calculate the projected impact on CWB
from an increase in own-source revenue from the 10th percentile
to the median as 1.3 CWB units. To give context to this increase,
the average 2011 CWB for First Nation communities across Canada
is 59 (62 in Ontario) and the comparable statistic calculated for
non-indigenous communities is 79 (81 in Ontario) (Indigenous
and Northern Affairs Canada (INAC), 2016). Based on this speci-
cation, the elasticity of the CWB index and per capita own-source
revenue is 0.05: that is, a 20 percent increase in per capita own-
source revenue is associated with a one percent increase in the
CWB.15 Based on the regression 3 specication, unspecied factors
captured in 2006 CWB index values swamp any independent im-
pact of own-source revenue this decade. In general, indigenous
participation in economic development activities via EDCs is not
an important element in higher community well-being. Better
organization and funding of basic services, in particular education,
remain crucial (Anderson and Richards, 2016).
The results of regression analysis are not unexpected. Some
First Nations experience substantially higher and others sub-
stantially lower CWB outcomes than predicted based on own-
source revenues and the other regression variables. Although our
evidence does not directly provide it, we would expect case study
analysis of communities that fall substantially above projected
CWB values to show better governance than those whose CWB
values fall substantially below. The price of success is eternal
vigilance: undertaking economic development activities via col-
lectively owned indigenous corporations requires ongoing and
close attention to the same managerial requirements for success
that apply to non-indigenous rms.
The theoretical framework categorizes and discusses many of
the institutional principal-agent and principalprincipal problems
that indigenous groups must confront in order to contain rent
dissipation and assure community-wide benets from economic
development corporations (EDCs). To the extent indigenous-led
EDCs enter into hybrid organizations with fractionalized property
rights, they will be subject to inevitable tension among owners,
whether over fundamental goals, the direction of organizational
strategy, or over the distribution of any surplus. Tension is likely to
15
The elasticity is calculated at the mean value of the 2011 CWB index (61.6)
and of own-source revenue ($10,600) among the First Nations with available data
(0.05 2.774E  4 * (10,600/61.6)). The statistics refer to the 64-nation sample.
be more intense when signicant resource rents are at stake.
There are important limitations to the empirical analysis un-
dertaken. The own-source revenue estimates may be inaccurate, as
may be the census data underlying the CWB index calculations.
Furthermore, the long-term impact of higher own-source revenue
may change over time and eventually be much greater than is
captured in 2011 data.
Thanks to evolving public attitudes and court decisions, the
indigenous peoples of Canada are in a far stronger position to
benet from resource development and other economic activities
than in previous generations. However, at least based on this
empirical evidence, there is a modest link, at best, between sub-
stantial own-source income and well being of communities.
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