Friday, May 3, 2013

Clarifying BATNA

Art, Betty, and Carl generate a "natural" externality by the joint product of the exchange between Art and that saucy so-and-so Betty plus the grumpy discomfort of Carl. It's a negative externality enjoined by free agents making choices informed by their institutional settings and the relative prices they face. That's just fancy economist talk for "nobody's making anybody do anything." There's no coercion here, just the misfortune of being in the wrong place at the wrong time.

That's what Coase wrote about in his JEL piece, "The Problem of Social Cost," these many years ago. Coase motivated the discussion with trains and corn, and notably without other folks fiddling with the underlying conditions that produce the disagreements wrought by errant potato chip gnashing or stray sparks from spinning steel. Contrast this with the notion of fiscal externalities, where the costs borne by the Carl analog exist because of a Choice made by the Public. Imagine that the chips upon which Betty blissfully binges aren't eaten in a university classroom, but in a prison classroom. A prison classroom where Carl is a mandatory student. Things change a bit. Carl can now claim some moral legitimacy when he takes that bag and stuffs it... somewhere uncomfortable.

The canon example of fiscal externalities used to justify coercive policy is like this: hospitals cannot turn anyone away for ER care, but they must cover their costs, so people who come though the doors after horrific motorcycle accidents may end up getting their care on the taxpayers' dime. This externality justifies the precautionary measure of mandatory crash helmet usage. If I'm paying for your recklessness, I have some say in how the downside risk is mitigated. Ditto for mortgage securities. The implicit bailout is used to justify the paternalistic policy. Questioning the bailout is madness, of course. What are you, a monster? Do you want to witness the chaos of bank failure? Do you want to let that head injury just bleed out?

Ignore the quasi-organized question begging implied by the invocation of fiscal externalities and consider for a moment the BATNA version of this phenomenon. I'm not yet sure what to call it, but in some instances, the alternative to striking a deal is defined not by the state of "nature" (by which I mean in the absence of legislative interference), but by some statute or other. A few days ago, I noted that the BATNA to mandatory schooling isn't idleness and poverty, but juvenile detention. The BATNA for registering with the Selective Service is prison.

And so on.

But should this distinction alter our interpretation of euvoluntary exchange concerns? Should it influence our analysis? I think so. When we make clear the distinction between natural and fiscal externalities, it exposes the circular logic that underpins some calls for paternalistic policy. Similarly, by identifying BATNA-by-fiat, we can more carefully parse arguments that underpin calls for subsidies. If it is legislators' pens that force worse alternatives onto constituents in the event they fail to strike a bargain, it might be wise to revisit the source of the non-euvoluntarity. To re-examine old justifications for policy nostrums, if you will.

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