Many public goods and club goods exhibit increasing returns.  A lighthouse, for example, is useless unless complete.  It’s difficult to get voluntary contributions to these types of good not only because of the free rider problem but also because contributors fear that their contribution will be wasted if others do not also contribute.  An assurance contract makes contributions contingent on some level of total contribution being reached.

Assurance contracts can help to solve coordination problems.  I agree to contribute to build the lighthouse if and only if enough others also agree so that production is guaranteed.

Fundable.org is making assurance contracts easier to implement.  If you want to raise money for a cause you can set up a Fundable group.  Contributions to the group goal are held by Fundable in escrow.  All money is returned unless the group goal is met.  If the group goal is met the funds are paid to the group leader.

It’s a cool idea but even more is possible.  In a paper published a few years ago, I show that the idea of assurance contracts can be extended to what I call dominant assurance contracts.  In a dominant assurance contract if the group goal is not met then everyone who offered to contribute is given their money back plus a bonus.  It turns out that it then becomes a dominant strategy to contribute and the public good is always provided!

Matt Yglesias responds to my post The Canary is Dead as follows:

Nononono, no, no! ‘E’s resting!

Well, I paraphrase but you get the gist.  Will Wilkinson and Jane Galt offer some more serious comments.  Or you could just have a laff.

Courtesy of Mahalanobis, I learn that my talk in Guatemala (from two years ago) is available on video.  If you are looking for a bit of comic relief, I believe that some of the Q&A was done in Spanish.

United Airlines, which is operating in bankruptcy protection, received
court permission yesterday to terminate its four employee pension
plans…The federal agency that guarantees pensions, the Pension Benefit  Guaranty Corporation,  will assume responsibility for the plans, which cover about 134,000 workers.

Some
retirees could see sharply lower pension payments as a result; others
will see little change in benefits, depending on a variety of factors.
Some retirees at US Airways, which has terminated its plans, have seen
benefits drop by as much as 50 percent….United plans to switch its current employees from traditional
retirement programs, which are called defined-benefit plans, to
defined-contribution plans like 401(k) programs

Now, let’s review.  A large organization counts on its younger workers and continuing high revenues to fund the pensions and medical care of its retired workers but finds that rising health care costs, longer life-expectancy, and its own inability to control spending force it to cut pension benefits and switch to personal accounts.

Kinda makes you go hmmm…doesn’t it?

The Justice Department may file suit against the National Association of Realtors (NAR) to prevent them from excluding discount brokers from access to the regional MLS systems.  I’m hardly a fan of antitrust but the market for realtors is a racket.  Six percent to sell a house?  Outrageous!

Putting aside the outrage the market for realtors is terribly wasteful.  Consider, house prices are much higher in California than in Idaho but commissions are stable at around six percent.  Thus, even though the realtor’s job, brokering a deal, is the same in California as in Idaho, a realtor in California will make much more per-house.  As a result, there are far too many realtors in California and many of them will spend an entire year selling only a handful of houses.  Indeed, many realtor’s spend most of their time prospecting for clients rather than actually selling houses – this is a huge waste of resources. 

The same relationship holds over time as over space.  That is, when house prices go up we don’t see a fall in commission rates.  Instead, we see more entry.  Since the same number of houses are being bought and sold, the extra realtors don’t make the buyer or seller better off and sadly the realtors aren’t better off either – instead the excess return is siphoned off in wasteful prospecting for clients.

Unfortunately, no one really understands why commissions are stable.  The answer is not monopoly.  It’s very easy to enter the market for realtors.  So why don’t commissions fall?  One can certainly point to some restrictive practices by the NAR but I don’t think that is the whole or even the major part of the story.

A clue to the puzzle is that we also see stable commission rates in law (contingency fees) and in services (tipping).  Why is the appropriate tip 15% at an expensive restaurant and at a cheap restaurant?  Does the tuxedoed waiter really have a harder job than the diner waitress?  Maybe (indeed, I have argued along these lines elsewhere) but the commonality across these very different markets tells me something else is going on.

Is it signaling?  Would you distrust a realtor offering lower commissions?  Again, maybe, but it’s hard to believe that with so much money at stake there aren’t enough people willing to take a risk on a discount realtor for long enough for reputations to be established.  I think part of the problem in the realtor market is that other realtors can easily discriminate against discount brokers by pushing their clients one way or the other – that says the antitrust actions will probably not be very effective.  But this doesn’t explain stable commissions in law or waiting.

It’s a puzzle and one worth solving.  Comments are open.

Take this quiz, courtesy of Alina Stefanescu (nor should you neglect her recent post, "What does the increase in Romanian exports really mean?). My results:

Your Moralising Quotient is: 0.10.

Your Interference Factor is: 0.00.

Your Universalising Factor is: 1.00.

In other words, I am pretty libertarian.  The questions about the dead cat and the dead chicken didn’t even make me break a sweat; after all, do I not think that people should have more sex?