Markets in everything

by on February 26, 2009 at 10:44 am in Economics | Permalink

Rather than a CDS, imagine a derivative security on the prospect of an endangered species:

Under their plan, the government would determine the cost of
protecting a species if it becomes endangered. That money would be set
aside to fund contracts with payouts pegged to species health. The
contracts would be sold to landowners and developers whose actions
directly affect the animals, though the contracts could be freely
re-sold.

Should animal numbers fall beneath a predetermined threshold,
contracts would be voided, and money devoted to anticipated recovery
programs. If the species thrives, investors would be rewarded, with
profits growing in direct proportion to species health.

"If there's a 99 percent chance that a species is going to survive," said
Mandel, "you could trade that like a high-ranking bond. You know it's
going to pay out."

I thank Adam Winski for the pointer.

zbicyclist February 26, 2009 at 10:53 am

The same derivative security wizards that protected our houses, our insurance companies and our banks so well should do great applying their skills to ecology.

Advice to gorillas: Be Afraid. Be Very Afraid.

MY February 26, 2009 at 11:16 am

and the contract on humans is analogous to the US Government CDS?

TheophileEscargot February 26, 2009 at 11:32 am

(See also the risk analyses coming out of derivatives markets recently… an estimate of risk is not risk).

babar February 26, 2009 at 11:34 am

i prefer evolution futures myself.

brian February 26, 2009 at 1:08 pm

Cool idea, but wouldn’t there still be a public goods/free rider problem? I own 1 “share” of the total animals in the woods, but my actions only minimally effect that total.

Private Marginal Cost != Social Marginal Cost.

Also, LZ’s point about the shorting & poaching strategy is both intelligent and hilarious.

missmarketcrash February 26, 2009 at 6:04 pm

Hit the Winski link. The “I’m bored” part is well worth a visit…

DocMerlin February 26, 2009 at 7:12 pm

Ok, despite my above tongue in cheek response. I think this is a bad idea. We need two requirements for this sort of system to work.

1) Direct link to personal responsibility for the good.
2) Money to be made on the good’s continued well-being, creation, etc.

Condition number one keeps a tragedy of the commons from happening, and condition number two keeps someone from destroying the good for profit.

A securities style good simply doesn’t do either of these. There is money to be made both on the short and on the long, so it fails condition two. The holders of the security are also not responsible for the condition of the creatures directly, so it fails condition one.

A better alternative if all you want is for people to keep species alive is to allow farming for that creature or keeping the creature as a pet. For example, if polar bear fur was farmed for, we wouldn’t lack polar bears. A successful example is Bengal tigers; it is estimated that there are more tigers in texas in zoos or kept as pets than there are wild in india.

Anonymous February 26, 2009 at 10:41 pm

On a timescale of millennia, species go extinct all the time. It’s nature’s form of creative destruction. How many went extinct the last time ice-age glaciers swept down to Texas?Conversely, there have been many periods with much warmer temperatures than today. The survival of any one particular marginal species doesn’t matter that much in the grand scheme of things.

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