Sunday, April 25, 2010

rent-seeking cycles

I wonder to what extent loss-aversion causes wars and other conflict. In times of growth, there seems to be relatively less in the way of attempts at rent-seeking, but when things grow scarce — not in any uniform absolute sense, but compared to where they were before — the rent-seeking picks up. For any given agent, it seems to me that whether rent-seeking is optimal is likely to be independent of whether the resources available from productive activity are growing or shrinking, at least supposing the rents to be sought are likely to be growing or shrinking at the same time.

It could be heterogeneity; perhaps the people whose fortunes are suffering the most are the ones doing the rent-seeking. Given that and incomplete information, perhaps people take the growth or recession of their own fortunes over periods of time as informative of their relative position; if everyone's fortunes become dimmer, but everyone only knows that their own fortunes are dimmer, they try to plunder their neighbors' fortunes, not knowing that they, too, have been shrinking.

Saturday, April 17, 2010

The Nature of the Firm

I've been reading my Coase lately.

Agency costs are sometimes raised as a limit to the size of a firm; as a firm gets larger, agency costs get worse, and for small firms agency costs are tolerated to realize the benefits of lower transaction costs of other natures. I wonder, though, to what extent agency costs could be a reason for a firm, rather than a net cost.

Suppose I'm producing a finished product from an intermediate created by someone else. I'm bad at determining the quality of the intermediate good; if the finished product is shoddy, I don't know whether I screwed up or whether he did. Someone else, though, is pretty good at motivating the other guy, in one way or another, to produce higher quality intermediates. By joining his firm, I'm outsourcing to him the job of handling the agency costs I face in the vertically separated market structure.

Insurance companies that deal with companies often actively help the companies reduce their risks; rather than pay $50,000 to the insurance company for insurance, the firm pays $40,000 and gives the insurance company the authority to inspect the premises, upgrade the sprinklers, and improve the security system. It doesn't make sense for each company to separately involve itself in becoming expert in loss mitigation of this nature, so they outsource it to a firm that is happens to have a great deal of financial interest in loss mitigation both for this company and for others like it. Any company will have to deal with agency costs, though, and it similarly makes sense for people whose expertise lies elsewhere to allow a firm to deal with their agency costs for them.

Tuesday, April 13, 2010

institutions and folk theorems

I think a lot of institutions are responses to the folk theorem; a repeated game admits a large number of possible equilibria, for various senses of the term "equilibrium", and institutions are a way to coordinate on one of them.