Hodak Value

MySpace recently booted about 29,000 sexual predators from its site. Nobody asked them to do it. They just figured that it was good business to keep their young customers from getting, you know, raped. On the one hand, one could read that as a positive indicator that a private company has every incentive to police its space and keep it safe for its intended users. On the other hand, one can read that as the perfect excuse for government involvement in the Internet.

"The exploding epidemic of sex offender profiles on MySpace - 29,000 and counting - screams for action," said Connecticut Attorney General Richard Blumenthal.

In North Carolina, Attorney General Roy Cooper wants a state law that would require children to obtain parental permission before creating profiles on sites such as MySpace, and require the site to check parents' identity.

For my Canadian readers, you can check me out on B1 of your Globe and Mail. The author did a good job of representing me. She may have slightly overstated things to say that my "consulting business (is) based mainly on applying mechanism design theory," (it's more broadly about using incentives to minimize agency costs and improve decision making), but frankly I don't know of anyone who incorporates mechanism design theory into actual, internal corporate practices to the extent I do. The author seemed thrilled, in fact, to find someone who actually applied this theory to real life business problems rather than another professor to provide theoretical solutions to hypothetical problems.

Alex Tabarrok did an excellent job illustrating the basic concept of mechanism design theory. The author mentioned two of my business applications (executive incentives and corporate investment decisions), but those are fairly complex, and reading what Alex wrote inspired me to think of a simpler example of an application I've implemented. So, here is one:

I some situations, one manager has to transfer an asset (say, real estate) to a particular other manager. There is no possibility of competing buyers or sellers. Manager A must sell it to Manager B. At what price? A simple negotiation would quickly break down. The seller would ask for too much; the buyer would offer for too little; neither side has an incentive to provide an honest valuation. Agreeing to split the difference wouldn't help--in fact, it would simply polarize the bid and ask prices.

So I overlaid an additional rule to this negotiation. I said that if the two managers couldn't agree on the price, we would set aside their respective best and final offers, and go to a third party appraiser with some experience with that asset (real estate, in this example) and provide an estimated value. The appraiser wouldn't even see the offers. We would then open up the best and final offers of the two managers, and the offer closest to the appraised value got their price. Think about how the dynamics are changed with this rule, and why the managers, in fact, were generally able to quickly come to agreement, almost never needing an appraiser to actually get involved.

I didn't mention to the reporter the fact that I was also a professor.

One of my alert students, after a discussion of informal (e.g., market-based) regulation versus formal (e.g., government) regulation in class last night provided this video by leftist animator Mark Fiore:

If I were of Fiore's ilk, I would probably object that animators should not be allowed to produce socio-political commentary without a basic education in political science and economics, using this video as an example of how dangerous that would be.

Alas, since I believe in freedom, all I can do is shake my head that people might actually believe that problems with meat or toys or mine safety are actually the result of too little government regulation.

In fact, despite voluminous government regulations that actually exist in nearly all markets, the most potent regulations remain the informal type. To understand the depth and power of informal regulation, one can begin by looking at the incentives of the players involved. Why would a regulator in Washington have more of an interest in Mattel's product safety than Mattel's managers or investors? How did Mattel's shareholders or managers come out ahead after this summer's string of recalls? It's hard to imagine that anyone has a greater interest in not harming Mattel's customers than Mattel itself, especially for a large company where any scandal in even the smallest area of their business affects their brand across all their businesses.

Then, one must consider the responsiveness to particular scandals. In a CNN article about the third of Mattel's recalls, they included the government's reaction in the middle of the article, and the market's reaction at the very end. It's kind of a Rorschach test of one's view of the world to select which statement gives you the most comfort:

"The CPSC has its own investigations currently underway to make sure products on shelves are meeting US safety standards," said (Julie) Vallese (CPSC Director of Information)

Wal-Mart has also hired independent laboratories to carry out 200 tests a day, focusing first on toys made for children up to the age of three, it said.

I just got back from my annual teaching visit in Switzerland. I left for Zurich earlier this week, soon after finishing an article I had written for Forbes about the governance challenge of 'utopia.' I wasn't thinking about Switzerland when I wrote the article, but I was thinking about the article soon after I arrived there. One of my points in the article (hopefully coming out soon) was that it's dangerous to invest utopian hopes in any particular leader; if they don't disappoint you during their reigns, you will surely be disappointed by their successors. This is a useful lesson to remember during our frenetic presidential campaign, where it seems everyone is looking for a hero or a savior, and the candidates seem happy to play the part.

While riding a quiet train past Swiss villages, the titular question came to mind. I would guess that most people who read this, and others like you, can name the British Prime Minister, French President, and German Chancellor. But no one knows the president of Switzerland. To be sure, the heads of the larger European countries are very powerful individuals, and their nations have far more vigorous foreign policies, which keeps the names of their leaders in the press with some frequency. That's my point.

Switzerland is among the most peaceful and prosperous nations on earth. But I've never heard of any Swiss president, let alone one leading this or that crusade. It seems to me that there is a relationship between those facts.