Friday 20 September 2013

Of Free Riders and Forced Riders: America's Cup edition

We're all familiar with the typical free rider problem. If there's some public good, individual incentives to contribute towards its funding are attenuated by non-excludability: if you benefit from the good whether or not you pay for it, why pay? And so we get all kinds of arguments for government provision of various public goods.

A couple of days ago, my former Econ 224 student Brennan McDonald sagely suggested that the America's Cup bid be funded via Kickstarter. Economists know that most of the "economic benefits" case for these things is, as Shamubeel Eaqub so precisely put it, bullshit. What's left then? If the fun from a big party outweighs the cost, fine. Otherwise, not. Brennan then suggests:
If we host the next America’s Cup, Kickstarter or some other sort of crowd-funding is the only responsible choice. We should be forcing these special interest groups to put their money where their mouth is. I’m sure that a non-trivial proportion of Kiwis would donate to such a campaign. The deal with council and government could be that if you reach $XX million in voluntary contributions, we’ll streamline the resource consents necessary.
I think Brennan's largely right here. Kickstarter's pretty well placed for funding things that provide warm glow benefits, though they're not the only one. I gave some money to the Indegogo campaign for SeaSteading's current fundraising initiative; I'll get a polo shirt to wear. Actually, a third identical blue polo shirt with a nice Seasteading crest. I get warm glow and get to show affiliation, they get money, I get some prospect-theory-based utility.

Will Taylor then raises the usual objection:
Yup, free-riding still could be an issue even for a decent Kickstarter. If we don't make payment mandatory, we'll get some free-rider problems from those who enjoy the benefits but refuse to pay. Sure. And I'm certain that Will here is simply raising the theoretical point rather than taking it as an argument for state funding of yacht races. However, others would use this argument as justification for state support: free-riding on a public good can provide reason for funding.

But there's a necessary complement to free-rider problems. If we do make payment mandatory through taxes, we'll get a forced rider problem: lots of people who get epsilon, zero, or negative utility from the yacht race are forced to pay for it through their taxes. I would currently be willing to pay $50 for the America's Cup to simply cease to exist; I'd pay more to abolish the Olympics. I hate the America's Cup. It clogs up tv, the Twitter Stream gets a bunch of unblockable nonsense added into it, radio blather gets worse. The America's Cup is almost intolerable being held a Pacific Ocean away; it would be unbearable in Auckland. At least it wouldn't be held in Christchurch.

Yes, I'm being ornery and maybe I'm exaggerating just a little. But worries about free-riders' benefiting from the America's Cup without paying lead people to force me to pay for stuff I do not want and the abatement of which I would view as a good. I wouldn't really push a button to abolish these things because I can't know that I wouldn't be doing more harm than good. But none of the darned boosters seem to give a hoot about whether they're doing more harm than good when they want to force everybody to pay for their parties. That's why they keep trying to frame this nonsense in "aggregate economic benefit" terms - so that they can pretend that even people who don't like the Cup get some notional benefit from it. And the merits of that argument were succinctly summarised by Shamubeel.

Free-riders can be a reason for government funding of public goods. It's possible for the aggregate true willingness-to-pay for something to exceed the cost of provision but for the payment not to be forthcoming because of non-excludability. But for stuff like the America's Cup, it's entirely plausible* that the losses from impositions on forced riders exceed, by orders of magnitude, the gains from avoiding free-rider problems. Please let's not go about creating political failures that are worse than the purported market failures they seek to solve.

James Zucollo asks for evidence that forced rider problems will here be greater than free rider problems. I'll confess that I haven't gone around and run surveys on it. But surely the onus ought to be on those who would use force to compel my payment for a yacht race to prove that the thing creates rather than destroys value. And it's not that hard to turn Brennan's suggestion of Kickstarter into something more like Alex Tabarrok's Dominant Assurance Contracts. In that system, everyone who pledges towards the Kickstarter gets some small reward for their pledge whether or not the Kickstarter raises enough money to activate. If the campaign raises enough money, everyone has to pay up for their pledge. But because everyone is rewarded for pledging regardless of whether the project goes ahead, free-riding problems are reduced. Maybe it's not perfect as you still need some high demanders fronting a bit of cash for the up-front payments to supporters, but it's a decent way of reducing free-rider problems while avoiding forced-rider problems. That boosters of major events typically go for compulsion first suggests, to me at least, something about their expectation that individuals have more than notional demand for these kinds of things.

I'm having a rather harder time imagining how you run a Kickstarter for "No America's Cup Bid For New Zealand". Sure, I can imagine a site taking donations. But where a pro-Yacht Kickstarter would actually pay for the event, an anti-Yacht Kickstarter would have to be providing something to the governing coalition in order that they not go ahead with an America's Cup bid. It couldn't just donate to the National Party as too many potential donors would be put off by that and because Parties can't actually be seen to be selling policy. Instead it would likely have to be providing some desirable-to-the-government public good but only in the case that there's no Cup bid.

Update: I've been informed that if New Zealand wins the racing, the next America's Cup will be held in New Zealand. While I still think this is better funded by Kickstarter if it does go ahead, it's seeming increasingly likely that there might be me and maybe two other people in the country who might be annoyed by having to pay for a yacht race. A lot of people seem to be getting utils out of this thing. And while I think that this makes it way more likely that you could get a million people each shelling out $10 - $15 to support the cup in exchange for exclusive supporter t-shits, it also means that Zucollo could be right: losses from forced riders could be low. Bread and circuses are popular.


  1. I have never understood "lots of people who get epsilon, zero, or negative utility from the yacht race are forced to pay for it through their taxes". If I'm going to make that argument then surely I have to look at the entire package that the government chooses to finance through taxes (since my tax $ is spread just as much through all the other programs). I have in mind a thought experiment -- the government announces some sort of proposed spending program (which exceeds their expected tax revenue). Taxpayers are invited to allocate their taxes to various bits of it (probably in small increments continuously so as to avoid everyone dumping everything into their favourite programs). In that model, not unlike a kickstarter for the entire program of government expenditure, and in the present time, I strongly suspect that "the yacht race" would get its proposed funding without a single one of "your" tax dollars being contributed to it. And, to forestall a possible objection, I suspect this would remain true even if the entire population were aware of the lack of economic benefit attributable to such spending.

  2. While I can perhaps fantasize about systems like the one you suggest (which also has problems), I simply hope that, at the margin, things like America's Cup could be flipped over to voluntary payment regimes.

  3. That was good for a giggle - but the next Americas Cup race is about to start - so must head back to the TV

  4. Of course (it was hardly intended seriously). I guess the main point is that fundamentally government funding of events of this sort is a political and not an economic decision. So I think the main criticism should be of the selling of such expenditure with false economic arguments -- not of the expenditure itself.

  5. "support the cup in exchange for exclusive supporter ..." whats?

    I posted an article just yesterday on Kickstarter and other ways of funding public goods: . I suggested something perhaps similar in spirit to Michael Albert's suggestion, but without any coercive taxation.

    Although I didn't mention it in the article, I had read Tabarrok's paper on private provision of public goods via dominant assurance contracts. I found it frustrating that his consideration of imperfect information still assumed perfect knowledge of the number of agents playing the game. I guess it would be very difficult to do otherwise within the framework of game theory.

  6. You are correct that I was merely raising the technical point:)

  7. The thing about the Americas Cul is - you don't bid for it. So even if we host it there is no reason public money has to be out up. They can race lasers if they want to and just pull them up onto Takapuna Beach. Any "costs of hosting the Americas Cup" are entirely self imposed and completely independent from us actually hosting it.

  8. I've just been alerted to the presence of this: - $100k won't go very far but it's a move in the right direction!