Bargaining With Assholes

September 5, 2013 at 6:41 am 6 comments

| Gabriel |

Like many people I was influenced by Ronald Coase and thinking about him on the occasion of his passing at the age of 102. Coase himself wasn’t fond of certain applications of the Coase theorem because people read it as “you can bargain” and forgot just how big an if it is to add “if the transaction costs are low enough.”

Adam Ozimek had a great post on another problem with the Coase theorem, which is that it creates incentives to over-produce externalities in the hope of side-payments. That is, it leads to extortion. In a nutshell Adam argues that reframing things from unpriced conventions to priced exchanges makes a big difference, especially when you’re dealing with assholes. Go read Adam’s post, you’ll enjoy it and I’ll wait.

I mostly wanted to point towards Adam’s post because he said a lot of what I was thinking, but I might as well add a few related thoughts.

First, Coase himself recognized this issue in his analysis of payola (which heavily influenced my own analysis of that subject in Climbing the Charts). In particular he noted that record labels (and before them music publishers) are much better off if you can’t buy airplay (and before that, placement in set lists) since once you can it quickly becomes mandatory and indeed the music industry occasionally formed monopsonistic cartels to (ineffectually attempt to) suppress the practice.

Second, the film industry experiences problems very much like what Adam is describing. If I’m minding my own business vacuuming my house and a PA from the film shoot next door knocks on my door and asks me to do it tomorrow instead and offers me $100 for my trouble, that’s classic Coasian bargaining. But eventually this leads to people driving around town looking for film shoots and then getting out leaf blowers, air horns, or whatever and this became so common that the state legislature of California wrote a law against it, as summarized by the state senate analyst:

Film producers complain that they are increasingly beset by knowing and malicious disruption of film production by bystanders who extort cash payments in exchange for stopping the disruptive activity. Production companies often accede to the extortionate demands because it is cheaper to pay $1000 or more to be able to continue filming than to stop and set up the production for another day. Among the more common disruptive practices are: reflecting light at cameras during filming to ruin film exposure and blowing air horns, or using leafblowers to interfere with sound recording.

Theoretically, such disruptive activity could be considered extortion, but for extortion to be committed, the threat must be to do something unlawful. A lawful act, even if reprehensible, is not criminal, and the kinds of acts complained of are usually not criminal. While it may be rude to shine headlights on a set, or run a leafblower nearby, it is probably not punishable as extortion. AB 534 (Brulte), pending in the Senate, seeks to resolve the same problem as this bill by criminalizing specific disruptive activities, making the conduct misdemeanor disorderly conduct or disturbing the peace.

Third, even in the absence of strategic extortion attempts, reframing from courtesy to market can make big differences in how people behave. The cite for this is “A Fine Is a Price” which showed that parents were more likely to show up late at daycare when there was a fine for this than when it was merely prohibited. In principle you could solve this by making the fine bigger until the workers saw it as desirable overtime, but that would lead to resentment on the part of the parents. (I’ve previously discussed this article at Megan’s old place).

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  • 1. Jenn Lena  |  September 5, 2013 at 8:40 am

    As an aside, the last is the logic behind prohibiting the submission of late papers, v.s. assigning a penalty for submitting them after the deadline. The cost, of course, is the bother involved in explaining to the Deanettes that the syllabus expressly forbids such practices and so you will not, in fact, accept the student’s paper even after their complaint.

  • 2. Graham Peterson  |  September 5, 2013 at 6:28 pm

    Awesome post, Gabriel. Thoughtful. Can I ask you two additional questions? To the degree that the Coase Theorem has been used to justify hierarchical organizations, how have sociologists dealt with the proposition? McCloskey puts it in her textbook that people submit to little dictatorships inside the firm, because the bargaining costs of market transactions between cooks and waiters would raise the price of the dish to the consumer so much, that the market would disappear from inefficiency — it’s a hilarious riff — you should read it in Applied Theory of Price.

    I understand sociologists are afraid of “legitimating” theories; would Coase’s formulation go under the banner of one of those? Also, is that kind of position what sociologists call functionalism? I asked Kieran about hierarchy after I read his paper on how open source software networks aren’t flat as daydreamed, but actually strikingly hierarchical. He couldn’t point me to a cluster of papers, but I’m really interested. (My personal prior is that hierarchy is not per se undesirable, and rather inevitable, but that organizational exit and entry, voice, and egalitarian ethics can create mobility for individuals even if the organizational structure remains hierarchical.)

    Also, I’ve been thinking about the famous daycare experiment and reading Al Roth’s stuff on repugnant transactions. No doubt the ethical framing and behavioral heuristics change dramatically when context shifts from monetized transactions to reciprocal or Maussian gifting transactions (though market exchanges are just gift transactions with immediate reciprocity!). Dan Ariely has conducted some fascinating experiments showing similar results.

    But here’s my beef: if the experimenters had taken a larger sample of daycares in the region, and varied the late fee until it was high enough to make people “consume” the same amount of being a doofus and picking their kids up late, I think we’d have a really nice measure of social capital — in dollar form. You’d be able to say “At X dollars consumers are indifferent between abiding a social norm and paying for the same social result — thus the social norm is worth X).

    I think what all of these experiments start with the assumption that social mores are relatively worthless, and therefore experimenters end up trading pennies in for a social convention. Then, surprise, they get people to act like assholes by monetizing the exchange with a pittance, when the social convention was worth gold. Would that be a promising direction for the research? Has it been done?

    • 3. gabrielrossman  |  September 5, 2013 at 9:54 pm

      I’ve always learned the transaction cost theory of the firm as received wisdom but I also think the Alchian + Demsetz model has a lot going for it. I don’t think this counts as functionalist per se since that term mostly applies to the societal level. I think of functionalism as kind of like group selectionism in evolution and being dubious for similar reasons.

      As you know I’m really interested in repugnance at exchange and am doing work on how it changes in gift exchange and similar practices vs simple quid pro quo.

      As for daycare, I think it’s a valid point that you don’t necessarily want to generalize beyond the observed range but it’s still a nontrivial finding that “a price” is qualitatively different from “no price,” especially given that econ reductionists of the Becker variety like to assume (and smugly condescend those so inferior as to have not reached similar assumptions) that “no price” is tantamount to putting a price of zero — when it is perhaps better to say it is a price of infinity or better yet a price in the incommensurable currency of honor.

      • 4. Graham Peterson  |  September 5, 2013 at 10:32 pm

        Have you read Lakoff’s chapter on exchange metaphors in Philosophy in the Flesh? He points out that exchange metaphors are everywhere in language. You do me harm, and have to “make it up” to me, etc. It’s as if we do keep track of a balance sheet of ethical good and bad deeds.

        In such a dual entry balance-sheet world, which there’s pretty strong evidence exists across cultures (thinking Mauss and Malinowski here), I think there are greater and lesser goods, and that in fact much of what we’re doing socially is negotiating these values in determining how to behave. Market transactions, in my view, are just a subset of this process of commensuration.

        I know I don’t have to point out to you that reciprocity heuristics are foundational, but the linguistic examples he give help add to the mountain of evidence showing how ubiquitous they are.

        I don’t like talk about incommensurables, mainly because I thought Marx’s chapter on commensurating incommensurables in Capital was weak. I hear these arguments a lot: there is a qualitative difference between X and Y. Sure. There is a qualitative difference between the number 3 and 4. And dealing with that categorical distinction can be quite useful. But 3 and 4 are elements of a continuous continuum, the set of real numbers (I just said continuous continuum, derp). I find that arguments that such and such defy comparison because there is a categorical, or qualitative distinction between them, are usually leveraged to destroy debate: keep you generalized model out of my back yard!

        I’m warming up to categorization via social spheres, incommensurable social objects, and so on, but I’m very wary still (and probably just echoing a philosophical debate that’s already been had before I was born).

  • 5. Graham Peterson  |  September 5, 2013 at 11:28 pm

    Also, I like “incommensurable currency of honor.” Measuring social values in terms of dollars like I suggested would be a way, at least strategically, to get economists to pay attention to the great value in non-priced social exchanges in the market (which the social capital literature seems to have failed to have done so far).

    So I see it more as not saying: “see all the world is merely money in the price system,” but a way of translating between languages. I take for granted that the price system is a linguistic system, and that prices similarly convey meaning (albeit in reduced form in order to allow decontextualized and impersonal exchanges to take place across greater distances of social space).

    What’s really strange is the belief that priced exchanges of social values are profane and promote conflict and bad behavior, when of course priced exchanges actually bring people together who otherwise would not have interacted, and open up channels for a variety of non-market social transactions to begin taking place: business people become friends and exchange honor and love, workers too, communities agglomerate and grow, etc.

  • 6. teageegeepea  |  September 7, 2013 at 5:05 pm

    Ariel Rubinstein found that the daycare didn’t keep accurate enough records for the “fine is a price” results to be reliable.

    Nick Szabo has written about the Coase Theorem failing in the presence of extortionists.

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