Tuesday, August 14, 2012

Underprovision and Knock-on Effects in a Euvoluntary World

Ian Ayres and Steven Levitt have an interesting paper I've had cause to lately revisit. Briefly, they find that the Lojack auto theft prevention system provides greater public benefit than private benefit. The reasoning is pretty simple: Only individual owners of the system pay for its installation, but since potential car thieves don't know which cars have the system installed, overall GTA rates drop, even for people not paying for the service. In economics, we call this a positive externality or spillover effect, and it's a common way of discussing public goods (for more on public goods, please review James Buchanan's excellent treatment here).

There are a few ways to solve externality problems, but one of the simpler ways taught in most intro econ courses is to tax (or regulate) negative externalities and to subsidize (or provide) positive externalities. An important exception to this econ 101 idea is most of Elinor Ostrom's opus. She and Vincent found that when societies fiddled around a little with residual claimancy and shared property rights, many of the problems with externalities were mitigated or erased on the community scale. This is pretty important because it can point to what I awkwardly think of as directional euvoluntarism.

If you'll recall, my last post was on homeowners' associations. HOAs provide a way for homeowners to cheaply lengthen their time horizons. Strictly speaking, they may not be purely euvoluntary based on BATNA disparity, but nobody really seems to care all that much. To get similar effects using government regulation, particularly at a county level or higher would almost certainly be less tolerable than what we have now. I therefore claim that if a reasonable counterfactual is government regulation of neighborhoods, then an HOA represents a move to a more euvoluntary society. Please note that if you believe that neighborhood regulations are beyond the reach of, say, state governments, I urge you to buy property in California and see for yourself.

So what would directional euvoluntarism look like? Let's take that Lojack example. Right now, Lojack is offered either as part of a the new vehicle price or as an aftermarket add-on. The positive externality bit is a feature, as there's no "protected by Lojack" sticker or anything and they won't even tell you where the device is hidden. So the traditional textbook answer to correct this spillover problem is to have government subsidize the installation of these devices in all new cars. This sounds like a winning proposition, doesn't it? There are fewer auto thefts, Lojack makes out like a bandit, and who knows, maybe even some career criminals will pursue gainful employment. At taxpayer expense of course. Now, maybe having taxpayers foot the bill still passes any reasonable cost-benefit analysis, but what if we could get the same benefits, but without using the coercive power of the state? How about if church groups or community organizations partnered with car dealerships to provide a few extra units to new car buyers? You might still have some underprovision, but you'd avoid overprovision in those neighborhoods that don't have low auto theft rates to begin with.

There's nothing strikingly new here. I'm really just making an appeal for a greater role for civil society. What might be interesting is to see what other effects might arise from directional euvoluntarism. Consider Glaeser, Sacerdote and Scheinkman's take on Emile Durkheim: social isolation breeds certain kinds of anti-social behavior. If I'm reading Glaeser et al correctly, capital crime rates might drop if citizens feel as if community bonds are stronger. This is a knock-on effect of an attempt to correct another, unrelated criminal activity.

Note that even if there are confounding endogeneity problems, at the very least a shift in the direction of euvoluntary civil management can address some of the Public Choice criticisms of bureaucracy, like mission creep and organizational sclerosis. Plus, we would be able to see more targeted problem-solving and greater experimentation. Again, I'm not going to reinvent the wheel here, there's lots and lots of good literature on the subject. I direct you to The Voluntary City: Choice, Community and Civil Society for a good primer into this topic. It's an excellent book and the arguments found in its pages are better than the ones I'm making here.

Natural vs. Institutional Public Goods and Bads (a teaser)

I'll now argue that many of the things we see as negative externalities are simply the result of inherited institutional forms. Take smoking, for example. Smoking causes cancer. This is obviously bad for the smoker, but as long as there is public provision of health care, it's also bad for taxpayers. Here, the externality is generated by the joint inputs of the smoking and the institutional arrangement. As long as these costs remain borne by the smoker, then it's increasingly hard to justify paternalistic policies (though not impossible, as folks can still claim information asymmetry, hyperbolic discounting and the like). Other externalities require no input from policy to be a problem. Indeed, much of the literature on externalities focuses on these natural externalities, things like smog caused by driving or floodlights caused by Justin. At the risk of leaving much unsaid, I think I'll conclude today's post by saying that if we're interested in making the world a more euvoluntary place, ameliorating each type of externality might present a different strategy. I think this deserves a little more thought, so I'll do some pondering and come back in another post with what occurs to me.

Some parting questions for discussion:

  • Is there really a meaningful distinction between destination euvoluntarism and directional euvoluntarism? 
  • If there's merit in the idea of directional euvoluntarism, are the conditions sufficiently separable that reformers could alleviate a problem with one independently or is it necessary to adopt a more holistic approach? Is partial equilibrium okay w.r.t. EE?
  • Are civil solutions strictly more euvoluntary than government solutions?
  • A related question: are some problems simply intractable using euvoluntary methods?
I think for the follow-up to this, the ol' 2x2 matrix would be a good approach. Stay tuned.

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Do you have suggestions on where we could find more examples of this phenomenon?