Sunday, October 15, 2017

Embedded Economics: Help Needed from Conrad Readers

As I have mentioned here before, one of my current writing projects is a collection of short works of literature that have interesting economic insights. In a conversation yesterday at an SSC meetup, someone mentioned a Conrad story that sounded as though it would fit in very nicely. Unfortunately he didn't remember the title. I am not sure if he was misremembering something in "Typhoon," which has a scene similar but less interesting, or if there is another story I have not been able to find.

The story as he remembered it involved a ship in a storm, as does "Typhoon." In his version, the money belonging to the crew was in a strong box that got so shaken that there was no way of distinguishing what belonged to whom. The solution was for the captain to instruct the crew members to each write down how much of their money was in the box. He would then add up the amounts and, if they came to more than was actually in the box, dump the box overboard. It's an ingenious solution, although I can see some practical problems, and would fit neatly into my discussion of mechanisms for making it in the interest of individuals to reveal information. The only thing I now have for that is the story of Solomon and the baby which is much weaker, since it depends on the woman who is pretending the baby is hers not guessing what Solomon is up to. 

In "Typhoon," the money that gets mixed up belongs to the Chinese passengers and the much less interesting solution is an even division.

Does anyone here know of the story in question? Does anyone have another work of literature that illustrates another solution to the general problem? Another example of a short work of literature with an interesting economic insight?

My discussion of the Solomon story and the general issue it illustrates

The current draft of the book, webbed for comments


Jubal Harshaw said...

The solution you describe is given in Steven Landsburg's Price Theory textbook in the chapter on common property and public goods. He cites Conrad's Typhoon as the source of the puzzle to be solved. Presumably Landsburg himself came up with the cleverer solution.

David Friedman said...

Thanks. That sounds plausible.

I don't think it works for Typhoon. Some of the dollars have probably been lost in the chaos and you can't assume that everyone knows exactly how much was in his chest.

Sam Hardwick said...

That solution is vulnerable to someone without any money at stake and who resents the money-havers at least a little. Such a person might report having had money and gleefully watch the chest being thrown overboard.

Anonymous said...

It has long seemed to me that regardless of which woman in the Solomon story actually gave birth to the baby, the one who was willing to give up her claim to save its life was a better choice to raise it; she was acting on behalf of its interests. It's kind of a version of the principal-agent problem.

Xerographica said...

I'm a sucky writer but I recently wrote a short Medium piece about preference revelation. Basically, what would happen if we automatically, and involuntarily, paid our true valuations? You're walking through a neighborhood and you stop to admire a nice yard... voila ka-ching! Your true valuation of the yard, $3 dollars, is automatically and instantly transferred from your account and put into the homeowner's account.

I suppose it could be interesting to try and figure out the logistics... but the real fun is trying to figure out the implications. To give credit where credit is due...

"If a pretty woman strolls through the hotel lobby many tired convention delegates may get some external benefits, but, presumably, she finds it to her own advantage to stroll, and few delegates would pay her to stroll more than she already does." - James Buchanan, What Should Economists Do?

God I love this quote... voila ka-ching! My true valuation, $50 dollars, was just automatically transferred from my account and put into Buchanan's account. Well... I suppose into his trust.

I don't know how much enjoyment delegates, and construction workers, derive from seeing a pretty woman stroll. But it's a given that if she knew, and received, their true valuations, then this information would certainly influence her behavior. It would enter into her calculus of deciding whether to walk or drive to the bookstore. Same thing with regards to her clothing decisions. It's easy to guess that beneficial behavior would be rewarded/encouraged. But there might be a few somewhat undesirable unintended consequences. Would it be net beneficial or detrimental if we automatically and involuntarily paid our true valuations?

I'd sure love to read a decently written story based on this premise.

Xerographica said...

I think this is relevant...

"The core proposal is you announce how much each piece of your property is worth, and you are then taxed as a percentage of that value (say 2.5%). At the same time, you have to sell your property for that same value, if someone bids for it, thereby lowering or eliminating the incentive to under-report true values. If you think this through, you can see it minimizes holdout problems." - Tyler Cowen, Should we move to self-assessed property taxation?

I love the idea of eliminating the incentive to under-report true values... but in this case there's more than one thing the homeowner would have to valuate. Besides having to valuate the property, the owner would have to valuate the cost of moving... which includes finding a new place to live, perhaps finding a new job, maybe pulling the kids out of their school and so on. These additional costs, which are challenging to valuate just on their own, are why foot voting isn't the most effective form of preference revelation. Preference revelation doesn't work so well with bundles. Plus, I don't see the logic of the owner having to pay these additional costs in the form of taxes each year.

But I'm glad that some economists are still interested in discerning people's true valuations.

Jubal Harshaw said...

I'd be curious to know if the Landsburg textbook was the source for the person David spoke to. Maybe they'll show up here in the comments and tell us?

bbartlog said...

Xerographica - some kind of friction or additional costs associated with moving would simply result in people attaching an appropriately higher nominal value to their housing to reflect that. While I suppose this would indeed result in slightly higher taxes for people who didn't like to move (compared to those who were willing and able to relocate easily), I don't know that it would be a major problem. More interesting to me would be the motivation to make your own housing look undesirable as a way to reduce the risk of being bought out. I suspect the exteriors in a city under such a tax regime would be poorly maintained, except in the wealthiest neighborhoods. Another question is whether it would or should be illegal to offer a bribe to a potential buyer in order to get them to buy some comparable unit instead of the (presumably nominally undervalued) one that you are living in. From the tax collector's perspective, allowing such payouts is probably a long-term good: since the only way many people could collect such bribes is if people are systematically undervaluing their housing, having a few people who go around merely *threatening* to buy would result in better valuation. But such a thing would only arise in the first place if the whole market were fairly thinly traded or illiquid, otherwise the potential buyers would be better off just flipping the houses anyway.

Xerographica said...

Bbartlog, what's the least amount of money that the average homeowner would be willing to accept to move? It's gotta be a lot of money. Deep roots aren't easy to dig up. So one potential consequence is that the constant threat of having to move would be a reluctance to put down deep roots. Do you really need to make friends with the neighbors? Do your kids really need to make friends at school? Also, do you really need so much furniture? Do you really need such heavy furniture? Does your record collection really need to be so large? There would be considerable pressure to adopt a minimalist/spartan lifestyle.

Of course I'm really not sure how frequently somebody would buy your home. But whenever somebody bought your home, you'd have to buy somebody else's home, and they would have to buy somebody else's home and so on forever. I don't think anybody would ever put their home up for sale since all homes would be for sale. In a few movies and shows an offer is made on a house that isn't for sale. Usually the homeowner accepts the offer because it's a lot higher than market value.

Except, I do like the idea of everything, and everyone, having a price. I wish there was a "dating" app where you could input your max willingness to pay to have sex with one of the other users. They would receive a notification of your valuation, but they wouldn't see what it was. They would enter their minimum willingness to accept to have sex with you. If your max WTP was greater than their min WTA... then you'd pay their min WTA and schedule a date. I'm guessing that this kinda app would be illegal though. It would turn virtually everybody into a sex worker. Needless to say I'm fan of the premise of the movie "Indecent Proposal".