Yay Stability Rents

Six years ago I posted on the idea of using combinatorial auctions as a substitute for zoning. Since then, news on how badly zoning has been messing up our economy has only gotten worse. I included the zoning combo auction idea in my book The Age of Em, I’ve continued to think about the idea, and last week I talked about it to several LA-based experts in combinatorial auctions.

I’ve been pondering one key design problem, and the solution I’ve been playing with is similar to a solution that also seems to help with patents. I asked Alex Tabarrok, whose office is next door, if he knew of any general discussion of such things, and he pointed me to a long (110 page) 2016 paper called “Property is another name for monopoly” by Eric Posner and Glen Weyl. (See also this technical paper.) And that turned out to be a relatively general argument for using the specific mechanism that I was considering using in zoning combo auctions, get this, as a new standard kind of property right for most everything! Looking for web discussion, I find a few critical responses, and one excellent 2014 Interfuildity post on the basic idea. In this post I’ll go over the basic idea and some of its issues, including two that Posner and Weyl didn’t consider.

But let’s start with basics. Imagine that you are the sole power over some new large empty territory, able to do anything you want with it. You will soon invite many people to (pay to) enter your territory, and each of them will need some sort of local property rights to support their activities. So you will need to divide your large territory into many smaller property units. And you will want to divide things well, i.e., to “carve nature at its joints,” so that you can promote the productive use of this territory. After all, if people expect to be more productive in your territory, they’ll pay you more for your properties. Yes, if you bundle things together badly, people might be able to re-bundle them in better ways later. But that could be a slow and expensive process; better to get it right the first time.

For example, you’ll want to put things that need to be coordinated more closely together into the same bundles, and you’ll want boundaries between the units that are easy to monitor and enforce. You may also want each unit to contribute to and be subject to some sort of governance structure, to ensure a rule of law and sufficient production of public goods. Even in the best case of a single owner who can choose any property rules he or she likes, this general problem of designing efficient property rights is complex and hard. But the framework I’ve just outlined is in essence the usual account of ideal property rights within the law & economics field (a subject on which I teach often) .

One important dimension of property design is the strength of the property rights. For example, in land property you might let each owner do absolutely anything they want with their land, or your might limit some activities (like explosives, pollution, and blocking views or sunlight) if neighbors are likely to place a higher value on such limits than each owner would place on their absence. And one key area where property rights can be stronger or weaker is regarding one’s freedom to set a resale price.

When you announce an offer to sell your property at a certain price, you in effect give an option to buy that property to the rest of the world. The world values this option, and values it more the lower is its strike price. Options on properties given to the world at lower prices make it easier for others to buy the properties that they value, and to assemble and recombine property units into new bundles. So when you design a property rights system, you might want to add extra incentives for people to create and maintain lower price offers.

Consider the examples of people who bought internet domain names, like “walmart.com”, early on in the hope of being able to resell them to the big firms who go by those names. Or consider homeowners who demand huge prices to sell their land to someone trying to assemble a large area to build a shopping mall. In these and many other cases, economic harm is done because owners can pretend to value their property for much more than they actually do. This also seems a big problem in combo auctions; one-sided combo auctions, where everyone buys from one seller, seem to work much better than do two-sided auctions, where many sellers can demand very high prices even when their values are much lower.

In 1965 the economist Arnold Harberger (of Harberger triangle fame) published on self-assessment in property taxes. The idea is to let each owner assess their property at any value they want, but that assessed value becomes a price at which they offer to sell their property to anyone. (Harberger didn’t invent the idea; it goes back at least to ancient Rome.) Posner and Weyl consider applying this basic idea to most all property, and call it a “Harberger tax.” That is, a simple way to create an incentive for low offer prices on any kind of property is to require the owner of that property to continuously pay a fee proportional to their posted offer price, i.e., the price they announce at which they will sell their property. The lower their price, the less they pay.

Of course the owner of a property is well advised to not set their price much below the value that they actually have for this property, to avoid regret should someone accept their offer. When people become attached to a property, their value will be well above its market price, and given an honest valuation it, the chance that it will be sold should be very low.

Now this fee is not mainly intended to raise revenue for redistribution or central services. It is instead intended mostly to promote efficient use of property, so that the best people use each item in the best ways. Because of this, I’d rather not call this fee a “tax”, and so I’ll instead call it an “stability rent.” Just as you can buy something by paying all at once or by making “installment” payments spread out across time, part of this stability rent is payment for the property.  But another part is a price you pay over time to increase your chance of keeping the property. That is, to increase the stability of your relation to this property. You can never guarantee perfect stability, however, as that would require an infinite rent.

At this point you may feel that the more familiar kind of property, where you buy something at once for good and then never have to sell it or pay any property tax on it, is the more “natural” kind. Relative to that, this alternate form may seem to you an unnatural mutant abomination. But note that in fact today you usually have to make continuing payments to preserve most property. You pay for maintenance, cleaning, repair, and for a place to store things. You usually also suffer substantial chances of losing most property, via obsolescence, destruction, misplacement, theft, and legal and government policies, such as eminent domain. And you already assign explicit monetary values to property when you consider if to buy or sell, and how much to insure it for. So these new continuing fees, property loss chances, and assessment tasks are mostly just changes in degree from what you accept now.

You can also think of familiar property as a special case of this new property regime, with the stability rent set to zero. And I am persuaded by the analysis of Posner and Weyl to believe that the most economically-efficient rent level is usually not zero. At least if we can ignore some complications, that I will mention soon. Yes, increasing the fee decreases the incentive of a property owner to maintain and improve that property. But for small fees that loss is outweighed by gains in making property easier to transfer to new owners. (And zoning combo auctions might work better.)

To deal with various problems, Posner and Weyl propose that owners be allowed to update prices at anytime, to lump items into bundles that must be sold together, to specify “non-additive prices on subsets of goods”, to deduct observable investments from rents, and to get up to several months to actually transfer property once sold. They also suggest that potential buyers can pay a small refundable fee to inspect properties, and that some (as yet not worked out) combination of blockchains and IOT (internet of things) be used to allow direct transfer of property control while protecting owner privacy and preventing mischief by officials. They note that private insurance could help people to ensure their ability to make future rent payments, and that private apps could help people to estimate and frequently update their many property values. With everyone always posting prices on all of their property, such apps would have a lot of data to work with.

I’ll also note that previous owners should be liable for any damage to property during a transfer period, and that if stability rents were distributed back to pools of owners with roughly the same wealth and other social characteristics, then individuals would only pay net stability rents when they put higher than average values on their properties, relative to others in their pool. Gramma is then only at risk of losing her longtime home if she values that home much more than do other people much like her.

Yes, you might not like having to pay more in this system to get stability of your property. But that’s because in this system you are paying more of the social cost of stability. Its like how polluters prefer a world where they can pollute for free, and don’t have to pay for the social cost of their pollution. The rest of us who have to breathe their pollution shouldn’t sympathize much with their plight.

Yes, this system adds some complexity to property law, but it can also greatly simplify many areas of law, including property tax assessment, eminent domain, necessity exceptions to contract, accident liability levels, corporate buyouts, and patent and copyright licensing,

Posner and Weyl identify several factors that influence the ideal fee level: property turnover rate, sensitivity of value to owner investment, variance and multimodality of value distribution, and whether value tends to grow or decline over time. Even so,

We would advocate a relatively coarse system with a small number of easily distinguishable categories such as natural resources, equipment, real estate, corporate securities, general personal property, keepsakes, and heirlooms. … Rates within these categories being set per a coarse and easily auditable heuristic, such as the currently observed turnover rate.

They estimate that an ideal fee level to be roughly half the rate of property turnover:

A 2.5% annual rate is likely to be nearly optimal on this basis for a wide range of assets, like factories, natural resources, and houses, where investment plays a significant role but allocation can also be seriously distorted. … [This] would transfer about a third of use value to [rent recipients] … [It] achieves 70-90% of the maximum possible allocative welfare gains and the investment losses erode only 10-20% of these gains. .. [This is] likely to raise .. 10-20% of national income in most developed countries. .. The [purchase] prices of assets would be only a quarter to a half of their current level.

Let me finish this post by highlighting two issues that Posner and Weyl don’t seem to discuss. First, social norms may often arise to treat those who buy property through this system as illicit “scabs” who betray a community. For example, stamp collectors might create a shared social norm to post low official prices on their stamps, and to shun anyone known to have bought stamps via such prices. This coordination could greatly reduce the average stability rents paid by stamp collectors, a gain that comes at the expense of non-stamp-collectors.

Similarly, in some community members might typically put all of their property into one single bundle for one entire price of everything they own. This community might then try to identify and shun anyone known to have purchased such entire bundles. Members of this community might then get into the habit of greatly reducing the prices they put on total bundles, and thus greatly reducing their stability rent payments. If a scab were to actually try to buy such a bundle, the target would correctly feel that this scab threatened to grab a large fraction of the value of everything they own. This target might well respond emotionally and fiercely, and his or her allies might respond similarly. The threat of violence could be very real here.

I thus suggest that the size of property bundles be limited to much smaller scales. After all, it is hard to see many people actually buying such large bundles, and thus hard to see how huge bundles can add much to allocative efficiency. I also suggest that stability rents be refunded via small enough pools of socially-connected people. The idea is for pools to be small enough to discourage groups from coordinating to reduce their payments relative to outsiders, and yet large enough for fees to give individuals strong incentives to reveal their property values.

The second issue I want to highlight is that a second enforcement mechanism exists. The mechanism that Posner and Weyl consider for encouraging people to declare accurate values for their property is the prospect that someone might come along and honestly value it at more than the declared price. In commodity futures markets, however, most traders are speculators who don’t actually intend to take delivery of the commodity traded; they instead hope to get out of the market before the official delivery date, and to profit from having bought low and sold high. Similarly, in this system there could also be speculators who seek to profit from mispricings, but who don’t want to actually take delivery of property.

When the owner A of some property puts a price offer P1 on it, and then B accepts that offer on date D, then A might have a month M until they have to actually make the property available for B to control on date D+M. Before date D+M, it is B who officially owns the property, and by the rules of this system B must offer a new price P2 for anyone else to take. But if C accepts this P2 offer during this period, it makes more sense for C to gain the right to take control of the property from A on date D+M, instead of forcing B to actually take delivery and then have another month to transfer it to C on date D+2M.

But if this is the rule, then an original owner A who had underbid and set price P1 below their actual value V might be tempted to pay a higher price P2 to get their property back again, with P1 < P2 < V. And a speculator might take the role of B hoping for just this outcome, from which they would gain a pure cash profit of P2-P1. Given a chance Q of A having underbid and thus being willing to pay P2 to get it back, taking on such a speculator role to challenge A’s claim of value P1 should on average be profitable if

Q*(P2-P1) > (1-Q)*(T+P1-P0),

where T is the speculator’s transaction cost and P0 is the price they expect to get selling the property to a third party.

People who are in the market to buy a property like this, but who are flexible on which particular property they buy, are in an especially good position to take on this speculation role, as they have an especially low added transaction cost. After all, they were already going to buy and pay a transaction cost. Thus professional speculators and flexible buyers will watch for clues that indicate underbid properties that can be profitably challenged. And if society applies a norm of honestly to value declarations, we may not feel much sympathy for people who are “exploited” due to lying about their values for property.

As a result, owners are induced to limit how far they set prices below their actual values both by the prospect that sincere buyers will arrive who sincerely value the property at more than their declared price, and also by speculators looking to profit from underbids. This means that for any given fee rate, declared values will be more honest. We can thus set fees to lower higher levels than we otherwise might and still get good allocative efficiency.

Overall I find this proposal quite promising, though still underspecified. Someone really needs to work out what sort of blockchain and IOT arrangements might actually be workable here. I’d also like to see something better for dealing with asymmetric info on property features than the inspection proposal given. And of course we should do lab experiments and field trials before we actually adopted such property rules on a large scale.

GD Star Rating
loading...
Tagged as: , ,
Trackback URL:
  • Brian Slesinsky

    Perhaps this “stability rent” might be thought of as a form of insurance, paid to hedge against losing control of the property? It seems like the biggest downside would be increased insecurity for people who for whatever reason aren’t able to afford to spend as much on insurance. Wealthy people can secure their property by declaring an extra-high value and paying the tax. People of lesser means might be more tempted to gamble.

    If you don’t want to sell, achieving certainty still seems difficult; it requires you to decide what’s the highest price an irrational person might pay (or a rational person who has new information not available to you). Prices set based on fear of having to sell seem likely to be less accurate than prices set by voluntary market participants who want to sell.

    Forcing market participation seems likely to be unpopular. But this scheme might work better as an optional alternative to regular property tax? People not particularly attached to a piece of property would be more inclined to opt in, making turnover more likely for low valued and underused property. It could be sold as a tax break for market participation.

    • http://overcomingbias.com RobinHanson

      This forces people to pay more of the real social cost of stability. Yes, they’d like to get it for free, instead of having to pay for it, just as people would like to pollute for free, without having to pay pollution taxes.

      • The Verbiage Ecstatic

        Let’s accept the framing that society is currently paying massive subsidies to its citizens in terms of giving them free stability. I would think the subsidies are disproportionately largest to low-paid workers. A successful banker wth three homes could lose one of the homes with a relatively lower personal cost than someone working three geographically-constrained jobs barely making ends meet could lose their one home. One is a nuisance, the other an existential crisis. So the question I have for you is, assuming society is paying a massive stability subsidy to keep a large portion of its working class’s heads above water, what is the societal cost of revoking that subsidy? Would that be value creating or value destroying?

      • http://overcomingbias.com RobinHanson

        As I said in the post, we could make sure rent recipients are at the same wealth level, and thus ensure payments are on average zero per level. So poor people aren’t hurt.

      • The Verbiage Ecstatic

        Oops, I missed that, sorry. Yes, I think combined with some form of compensatory redistribution, this becomes much more palateable. That said, I still can’t honestly imagine selling this scheme to a population of non-economists…

      • TracyW

        But if you lose your one home you could use the payout to buy another conveniently located one, also compulsorily.

  • https://llordoftherealm.wordpress.com/ Lord

    Seems like this would shift the market to rentals, the owner passing along the stability rent to the tenant and not being overly concerned with keeping it low and the tenant not being too interested in buying since ownership is limited.

    If they could really change the price anytime, the temptation is to keep it low until the first ‘offer’ arrives then jack it up above any other as dissuasion, not completing it, or rapid fire ‘sales’ resulting in the original owner retaining it at above market value since there are moving costs to consider, the temptation being to extort the tax from owner.

    • http://overcomingbias.com RobinHanson

      Offers don’t arrive; acceptances arrive, at which point it is too late to change your price.

      • Brian Slesinsky

        Is that essential? Suppose instead sellers are allowed to raise the price rather than accepting an offer. Then below-market prices attract bids. The seller raises their price. In the end, this results in an accurate price.

        It seems like prices based on real bids would be more accurate than prices based on the sellers’ guesses as to what a theoretical buyer might offer?

        In a hot market, bids will be a nuisance to the seller because they cause the property tax to go up, but this is less disruptive than an unintended sale. And assuming only serious bids cause this to happen, they are going to market rate.

      • http://overcomingbias.com RobinHanson

        Yes, completely essential that price offers be real offers rather than teasing suggestions.

      • https://llordoftherealm.wordpress.com/ Lord

        Which is a problem since many actual offers fall through once lenders and other parties get involved and I don’t know many lenders willing to lend without collateral.

      • TracyW

        This would only be for compulsory sales. There’d be nothing stopping a buyer finding a willing seller and negotiating a contract dependent on finance.

      • Brian Slesinsky

        I don’t see why. We can think of the initial price as the reserve price in an auction that will determine the real price. Is there something wrong with holding an auction to determine a price? Why shouldn’t the current owner bid in the auction?

      • https://llordoftherealm.wordpress.com/ Lord

        Not if you want to extort the owner. There would be an offer market and a sale market, and even with a sale, owners would commonly rebuy at or above the new price unless transaction costs were high. The latter especially means an offer market because it would quickly become expensive to owner and buyer alike with only the agents prospering.

  • Michael

    I wonder if such a system would become more cost-effective than frivolous lawsuits for high-cost harassment.

    Speaking of asymmetric information: buildings are often complicated technical systems, and you cannot enforce documentation handover when documentation for safety-irrelevant things is incomplete in the first place. That means that fancy high-end custom smart buildings will effectively get a tax discount compared with more run-of-the-mill ones.

    I guess maintenance contracts could have interesting poison pills, too…

    • http://overcomingbias.com RobinHanson

      Yes custom products have more asymmetric info, which can let people shave their prices further below value without getting caught.

      • James Ormrod

        The ultimate Reductio of the poison pill of asymmetric info is the cryptographically controlled auto-demolition system, or for more capable entities, the tactical nuke.

        We thus arrive back at Formalism or some version of micro-sovereignty where ground truth is established at the level of promissory destruction.

      • http://overcomingbias.com RobinHanson

        As I said in the post, you’d be liable for destruction to the property after someone bought it.

      • http://invariant.org/ Peter Gerdes

        I think James Ormrod is pushing on the ambiguity as to when the damage occured from an automated system. If my house is infected with super termites (uncontrollable) the value drops when the infection is noticed not when they finally eat through all the wood siding.

        Surely the system doesn’t allow someone to buy my house in the interim and then sue me for the damage caused by the existing termite infection he knew about.

        Similarly, I suspect James Ormrod would argue that since the auto-destruct system was completely out of his control (no matter what he did it would destruct after title transferred away from him) and installed before the purchase the market value was already ~0 and he did no further damage.

  • http://invariant.org/ Peter Gerdes

    On first glance it seems to me this would discourage many types of investment in properties/locations. After all, if I make any changes (wire it for Ethernet) then I have to immediately raise my valuation to ensure someone doesn’t steal this extra value out from under me without fair payment. So you’ve applied a tax to property improvements with the particularly unattractive property that the longer you put off the improvements the less you pay.

    Also, it seems that this system would have weird effects based on how certain and stable real estate prices were. After all, there are any number of ways we invest value in a property that are non-transferable to future owners (memories, advertising for a unique business at that location).

    Now if there was very little variation/uncertainty in the prices that other people might value your property at you can safely choose not to include this value in your valuation. After all no one else will pay for your memories and if you are certain that no one else with a wildly different idea of real estate prices will come along you can save rent.

    On the other hand, if you think there is a possibility some developer or major institution might come along with a surprisingly high valuation of your property you better include how much you enjoy living in a house you made memories in that valuation you report so you don’t have it purchased for too little. I worry that the net effect of this would be, rather than increase land use efficiency, decrease it as people band together to use political power or personal influence to block any projects assembling blocks of land or otherwise likely to show up suddenly with a surprisingly high valuation so everyone in the community can enjoy the benefits of living somewhere familiar without having to pay the rent on that value.

    • Dave Lindbergh

      Existing property tax systems tax the value of improvements, so there’s nothing new there.

      The idea is that people declare their valuations at the price they’re actually willing to sell at. If they do so, the problems you list don’t exist.

      Would real people in fact declare valuations they’re genuinely willing to sell at? Or will they game the system by declaring a lower valuation (to save on tax), and then be unhappy when a buyer accepts their offer?

      If a lot of people do the latter (and people will certainly be incented to do that), popular acceptance of this scheme may be difficult.

      • https://llordoftherealm.wordpress.com/ Lord

        Actually, I think there is very little difference between this and the current system of taxation, the difference being this purports to identify what people value their home at. I think this is imaginary. People don’t know what they value it at and won’t know what to value it at until time to sell. Property taxes are based on actual sales and we only know what the marginal value is. Owners can only value it relative current listings and sales and only know it is higher than that or they would be selling. What they value it at will be dependent on what others are valuing theirs. Most may be willing to sell at twice current market value but that can vary with personal situation, economy, growth, other availability, etc. It is asking a question people aren’t prepared to answer.

      • Dave Lindbergh

        I think you’re right that it’s a difficult question to answer.

        But don’t make the assumption that there’s only one price – the value people will set when their property is “off” the market has little relation to the value when it’s “on” the market.

        When I want to sell my house, I look at the market, and try to get the best price I can – in the market as it is.

        When I don’t want to sell my house, my value for the house is much, much higher – that’s what it means to say “I don’t want to sell my house”.

        The “on market’ price is a market price.

        The “off market” price is what you have to pay to get me to willingly put up with the bother of moving – finding a new place, changing my address, moving my stuff, putting my kids in new schools, etc. That’s a huge hassle and I’d charge accordingly – maybe 5x or 10x the market price.

        I think Zillow calls it a “make me move” price.

        When I decide to put my house on the market, I change my price to something competitive. When it’s off the market, I raise it to fully cover the nuisance value of having to move.

      • http://overcomingbias.com RobinHanson

        If people don’t know value until time to sell, then in this system they will always know, because it is always time to sell.

      • https://llordoftherealm.wordpress.com/ Lord

        No they won’t if they don’t want to sell, they will only know it will have to be much higher to deter selling. It is no different from the current situation other than asking for a fictitious price sufficient to deter sales which will always be much above market. Even a new buyer will have to set an offer price much above what they just paid for it to expect to keep it. This fictitious price can be all over and would be dependent on that of others and would change if any were sold at it for its purpose is to deter selling rather than sell.

  • http://invariant.org/ Peter Gerdes

    Also why privilege space over time? Just as coordinating land use across space can offer increased value so too does being able to assemble the rights to a structure at a predictable price for a long period of time (e.g. if I want to build a doomsday seed vault).

    Yet this proposal prevents people from assembling secure property rights for long temporal periods since, they can never be sure that at some point in the future this area won’t have a real estate boom increasing valuation based rent above what they can afford. Sure, they could buy some financial instrument based on property values in the area to cap their yearly payments but they are now paying a huge premium to hedge against this risk.

    So it seems we’ve just transferred the inefficiency problem from the spatial to temporal domain.

    BTW how does this work if you want to buy property to use as a garbage dump, nuclear waste disposal or other negative value activity? I suspect there is some more inefficiency here.

  • davidfriedman

    Am I correct in interpreting the final bit of this as describing a situation where the initial owner A values the property at more than its market value and sets the price a little above the market value but below his ideosyncratic value? Speculator B then buys the property with the intent to sell it back to A at a profit.

    If so, I think there is a problem in selling the scheme. Many people will feel that it is unfair for A to be forced, if he wants to avoid such situations, to pay tax not on the market value of his property but on its value to him. The obvious case is the house you grew up in and want to bring up your children in.

    A further possible problem is that this creates a disincentive to make sunk cost investments. If I have my house repainted in a style I particularly like or my basement set up as a playroom for my kids that makes me more vulnerable to someone who buys in order to sell back to me. This is probably an efficient incentive wrt a buyer who actually values the property more than the present owner but not, I think, in the case being discussed.

    What is the Roman example of the self-revealing property tax? There is a self-revealing rule in Athenian law, although not exactly for a property tax, but I don’t know of a Roman one.

    • http://invariant.org/ Peter Gerdes

      You could avoid this if you were able to credibly commit not to buying your house back. Say any money you got from the sale went into a trust which blocked you from purchasing that same house again.

      However, I doubt this would be necessary. Remember for this to work the difference between the idiosycratic value and the market value must exceed all the transaction costs.

      The consider our (evolved strategy?) strong inclination to say, “Fuck him. I don’t care if I’m worse off he’s not getting a penny of my money.” We are willing to do this with pretty large sums even when its explicit and idiosyncratic value is unobservable so we will probably just tell ourselves the story: ohh its not actually worth enough to buy back, so we can both feel like we came out ahead and didn’t pay them a buck.

      This will happen enough that such transactions won’t be profitable in equilibrium.

    • http://overcomingbias.com RobinHanson

      I don’t know the Roman-era example; I’m just repeating what the paper said. Yes, this reduces incentives to make investments, but arguably only by a small amount compared to the allocative gains.

      I think norms against lying could be used here to reduce sympathy for owners claiming this to be unfair. The rule is that you are supposed to declare your actual value for the property. If you lie and then suffer because you are caught in a lie, others might not feel that sympathetic toward you.

      • https://llordoftherealm.wordpress.com/ Lord

        The problem here is your value is dependent on what others value their property at. If you don’t want to be dispossessed you need to price yours above the value of many others and they must do the same while only those who actually want to sell would want to price near or below market, for market would be the level most set. You might be willing to sell if you could buy another, but may not want to be exposed to being excluded from the market.

    • Dave Lindbergh

      The whole basis of the scheme is that owners declare their idiosyncratic values, not market values. (Actually they need to declare a slightly higher value than that, to avoid transaction costs turning a breakeven sale into a loss.)

      But since everyone has to do that, there’s nothing unfair about it – the higher valuations just serve to reduce the tax rate.

  • davidfriedman

    Note that one attraction of this sort of scheme is that it eliminates the argument for eminent domain.

    • http://overcomingbias.com RobinHanson

      It also eliminates most of the need to void contracts based on Necessity as well.

    • http://cannabismuth.com/blog/ Cannabismuth

      It eliminates that “need” by making it open to anyone, making it much worse.

  • Graham Asher

    This idea is indeed an abomination, as you suggest some people might think. It gives anyone with enough money the right to deprive me of my property without redress. As an admirer of Robin Hanson I’m sad that he takes this sort of thing seriously.

    An important clue to the fact that this is a very bad idea is the amount of complexity in the rules needed to implement it; this complexity is admitted even by its supporters. I am reminded of the epicycles needed to save Ptolemean astronomy.

    Property rights are fundamental to a free society. The more absolute they are, the better. Another fundamental principal is that contracts are voluntary.

    • http://overcomingbias.com RobinHanson

      Yes, this system adds some complexity to property law, but it also greatly simplifies many areas of law, including property tax assessment, eminent domain, necessity exceptions to contract, and accident liability levels.

      Law has already moved a long way from absolute property rules, and usually for good reasons.

      • Graham Asher

        I have the right not to sell at any price. Forced sales (compulsory purchase for, say, road building) are uncommon and subject to legal scrutiny, public enquiries, and so on. At least they are where I live.

        Apart from the tyrannical nature of this proposal, it imposes the burden of valuing all ones property, and the gross invasion of privacy of having to reveal the nature and location of all ones property.

    • Dave Lindbergh

      Without redress? You get paid the price that you yourself declared was the price you were willing to sell at.

      People generally value things they already own at higher than market prices – if they didn’t, they’d sell in the market, and so wouldn’t be owners anymore.

      So the redress you get is the difference between market value and the value you yourself put on the property.

      • Graham Asher

        Redress means having the right to prevent a forced sale without having to pay a confiscatory tax. I thought that was obvious. In practice this absurd idea would cause open revolt and be unenforceable except by a dictatorship like that of the Khmer Rouge.

      • Dave Lindbergh

        I don’t think it’s any more absurd than property taxes. Have a look at property use in countries without property tax.

        People sit on property for generations without using it for anything.

        Unless you’re an anarchist ala David Friedman (who’s on this thread) tax has to be collected somehow – this method has many advantages over the status quo.

        Proposals have to be considered against practical alternatives, not against some unattainable ideal.

      • Brian Slesinsky

        The difference is that if you pay property tax, there’s no uncertainty about whether you get to keep the property. This proposal adds a new kind of uncertainty over ownership even for people who pay the tax, because you don’t know whether you paid enough.

      • Dave Lindbergh

        But you do know if you paid “enough”.

        You paid enough when you’re indifferent between keeping your property and accepting a buyout at the price you picked.

      • Brian Slesinsky

        The calculation is more complicated due to having to pay rent on the price you picked, which needs to be traded off against short-term competing needs and the cost of moving. Also, it’s something like an insurance calculation: how much are you willing to pay to insure against an unlikely event? With the additional complication that the odds aren’t known and fluctuate with the market.

        Generally speaking, consumers aren’t good at pricing insurance and rely on market prices. Even insurance companies sometimes have trouble with this calculation (in the presence of competition they often price too low).

  • Yosarian2

    I think there’s a huge problem here when it comes to items of sentimental value. There are many things that I own that I, personally, value at much higher then their free-market worth actually is. Everything from my dog to my wedding ring to my musical instrument. If I set a price on those kinds of things at a rate that I would actually be willing to sell them, it would be astronomically high, but I wouldn’t be able to afford to pay taxes on that. Or, on the other hand, if I set the price of my dog to the actual (pretty low) free-market value of buying a older dog with some health problems in the free market, then anyone could easily extort me by threatening to buy my dog from me unless I gave them money.

    • http://overcomingbias.com RobinHanson

      For things you value much more than anyone else in the world might, as a practical matter there’s little risk if you set your stated value above that of the 2nd highest value that anyone else would place on it.

      • Dave Lindbergh

        Reading the comments here, my greatest concern with this proposal is that most people can’t understand it.

        Your readers are exceptionally bright, yet many seem to struggle to understand the idea of indifference – evidenced by the repeated comments about setting prices based on market value instead of personal value.

        One of the requirements for a successful tax system is that ordinary people can understand it. It may be that certain evolved ideas about property are difficult to modify.

      • Yosarian2

        The problem is that the “indifference value” of a lot of items that you personally highly value would be really astronomical, far above the market value, which makes paying taxes on that actual value completely impractical (unless the tax rate is very low to account for that, which would then create other weird distortions since you would end up paying most of your taxes on your sentimental attachments instead of on the things that are objectively valuable.) I guess the net effect would be to encourage people to get less attached to things in general?

      • http://overcomingbias.com RobinHanson

        No, real property values are just not astronomical.

      • TracyW

        Do people really value those many items that much? I get valuing a pet hugely. But mostly I don’t see people taking serious efforts to protect many of their possessions from fire or the like, e.g. by using fire proof safes. Which is what I’d expect if they truly valued them astronomically.

      • Yosarian2

        That’s a good point, but I think that has more to do with people consistently underestimating certain types of risk. By the same logic, people won’t spend $15 on a smoke detector at home, because they don’t really believe their house will burn down, but will gladly spend a million dollars on a surgery that might have a chance of saving them from cancer.

        Which may be another problem with this kind of scheme; people will likely systematically under-price the risk of, say, someone buying their home out from under them, not pay enough on an ongoing basis to prevent that, and then be shocked and horrified when someone does it.

      • Yosarian2

        Sure there is. Nobody else in the world may value my dog at more then $200, but if I value my dog at some astronomical sum but I price him at $400, anyone can say “I will buy your dog for $500 from you right now and kill him unless you give me $50 every month forever”. They can do this on a regular basis, to lots of people, knowing that almost no one will call them on it; if someone does they lose money, but that’s going to be rare.

        s

      • TracyW

        In that case go to the police.

      • http://cannabismuth.com/blog/ Cannabismuth

        This system would make such a thing legal. Indeed that would be the whole point of this system.

      • TracyW

        I don’t follow.

        It’s currently legal to report to the police that Bob committed a crime. But it’s illegal to tell Bob you’ll report him to the police unless he pays you keep-quiet money. The latter is extortion.

        Why do you think this system would need to allow threats of “pay me or else?”

    • Dave Lindbergh

      Existing property tax systems mostly tax land and buildings – things that are immobile and difficult-to-impossible to hide. (Some tax cars – I suppose the idea is that they’re already required to be registered with the state, so are hard to hide).

      Whatever its theoretical merits, I don’t think any tax scheme that requires people to make an inventory of all their possessions – down the to last paperclip? – can be practically workable. Aside from the overhead of the inventory, such things can be trivially hidden.

      I think any property tax scheme needs to be limited to large, immobile, unhideable things.

      Land, for sure. Buildings, probably. Any property that inherently is on record with the state (I’m thinking patents and copyrights), maybe. Portable chattels – no.

      • http://overcomingbias.com RobinHanson

        The ability to lump things into units makes it much easier to value everything you own. The harder part would be disclosing lots of info about that lump to potential buyer.

      • Dave Lindbergh

        Ya, I can lump, but that doesn’t make the overhead of accurately describing the content of each lump disappear.

        And it’s trivial to “forget” to include small valuable things – jewelry, gold, antiquities, etc. Preventing cheating on such things seems impossible.

        One of the great merits of property taxation is that it’s difficult to cheat – you can’t hide a piece of land.

      • http://overcomingbias.com RobinHanson

        An obvious alternative is to set the stability rent to zero for difficult types of property.

      • renato

        How would you tax those lumps?

        If there is a different tax between categories, all of the value of the lump goes to the lower category (Land+House 0%, my personal stuff 100%), not only reducing the tax I have to pay, but also enabling me to set the bundle price to infinity. If someone can force to buy only the land+house and not my other things, then the lumps are useless.

        If you cannot lump things together, how do you define what is the house and what is not? Isn’t the house itself a lump?

      • http://overcomingbias.com RobinHanson

        The simple solution is to not allow lumps that cross these categories.

    • http://overcomingbias.com RobinHanson

      As long as you aren’t much more sentimental about whatever you value most, than others are about what they value most, you won’t lose on average relative to others.

      • Yosarian2

        If I’m not ethically willing to threaten to buy and then destroy things of sentimental value in order to extort money from them, I will lose on average to people who are willing to do that.

      • http://overcomingbias.com RobinHanson

        No, even if you aren’t willing, someone else will be willing. So everyone will face such threats.

      • TracyW

        Not if you have a bit of acting ability.

        Buy or make something. Pretend it’s of immense sentimental value. Put a high price on it. If need be, pretend you just inherited it or found it in the attic or something. When the extorter bites, oh so reluctantly, with tears and wailing, hand over the object. Put the money you made in the bank. Repeat.

      • http://cannabismuth.com/blog/ Cannabismuth

        i do value sentimentaln things more than most. It’s none of your business how I live my life. You may not raise my taxes so that psycopaths can steal property more easily.

  • Pingback: Rational Feed – deluks917

  • renato

    How would a rent contract be enforced after the property is forcibly bought by its set value? Those rent contracts can be easily used to distort the market value, reducing the tax value, or even to prevent someone from buying the property, as it would only be effectively possessed after the contract expiration (never).

    • http://overcomingbias.com RobinHanson

      If you can’t prevent a sale, then you can’t write contracts that guarantee there will be no sale. So your rental contracts have to allow for that possibility.

      • renato

        Got it, Thanks.
        Then, in this new framework the rent contract would increase the market value of the property in order to guarantee itself, instead of reducing it due to the buyer having to pay an additional to null the contract.

      • renato

        I took a look on the article and this inversion on the property valuation still bothers me. It puts more tax on property being used (by the owner or a tenant) than on the one that is idle or for speculation. If the new tax level is similar to the actual, you just start taxing personal preferences and the avoidance of moving costs.
        Maybe, an exceptional treatment on the property where one lives might
        eliminate most of people’s concern with the new property system and
        should not be hard to implement while maintaining the allocative
        efficiency.

        The proposal looks quite promising, but the authors’ insistence of taxing every kind of property is not only a dystopian form of monitoring, but also create some new forms of harassing people by forcibly buying their stuff and imposing trade burdens on them.

      • http://overcomingbias.com RobinHanson

        “Insistence” is too strong, I’d say they “explore” every possibility. Unused property is more open to purchase and changed use, and that offers a benefit to others, and this system rewards that benefit.

  • http://priorprobability.com/ prior probability

    Maybe the seasteaders could try this out.

  • Frederic Bush

    So basically this would systematically provide advantages to people who don’t place any sentimental value on their possessions, their pets, their neighbors, or their soccial connections. Sociopaths.

    • Frederic Bush

      You can also, if you get into a dispute with someone, immediately buy key possessions of theirs and possibly their house and car. Anyone who has been trying to save money by not declaring an outrageous valuation on their property is at risk of extortion.

      • Yosarian2

        Or just buy the diabetes medicine they need to live from them, for that matter. Works best if you do it at a time when they can’t easily get to the drug store.

      • TracyW

        The proposal includes a waiting period.

      • TracyW

        This implies an arbitrage opportunity. Place a high value on your key possessions, say 20% above market value, provoke someone with deep pockets and a hot temper, buy replacements, put your 20% profit in the bank, repeat until they either stop buying your stuff or can’t afford to.

      • Frederic Bush

        Then they ignore you and chortle as you pay 20% extra taxes. Or they just buy all of your family keepsakes and allow you to keep your IKEA furniture.

      • TracyW

        Only if you’re daft enough to tell them your plan.

      • http://cannabismuth.com/blog/ Cannabismuth

        But that sucks. I don’t want to do that, I just want to own property not play little libertarian thought experiment games. This system is sucky. It is worse than property taxes in every way.

      • TracyW

        Then don’t play.

        I’m sure that some other people will step into the role of making money at the expense of hot-heads with deep pockets.

      • http://juridicalcoherence.blogspot.com/ Stephen Diamond

        I just want to own property not play little libertarian thought experiment games.

        It’s notable that this proposal seems popular with libertarians, since it doesn’t seem to be very libertarian at all. [What gives the state the right to order me to reveal, on pain of partial confiscation, my private valuations?]

    • http://overcomingbias.com RobinHanson

      A strong attachment to stuff is usually called “materialism”, and we tend to give lip service to disapproving of it.

      • Frederic Bush

        If you want to concede that material wealth is not important, by all means do so. I don’t think this system is what you end up with.

      • http://juridicalcoherence.blogspot.com/ Stephen Diamond

        Is it less materialistic to be attached to things rather than to money? I think you misunderstand the term, which opposes obtaining wealth in general to pursuing the spiritual or intellectual. Anti-materialists will not, as a rule, be pleased with having to attach a monetary value to every possession. This practice is of the essence of a materialistic ethos.

        Still, it seems that allocative inefficiency is a major market failure. I’m not sure that sentimentalism about possessions is a super-important value.

  • Frederic Bush

    Also, what about the possibility of insider information? If you get wind of a new development or a natural resource find you can instantly just buy all the property involved without the owners being the wiser.

    • http://overcomingbias.com RobinHanson

      Yes, and law today doesn’t require you to disclose such info to those you buy from exactly because this is overall efficient behavior to be encouraged.

      • Frederic Bush

        There is a lot of time for someone to figure out what is going on in the current system and raise their price accordingly.

        You aren’t supposed to be able to profit from insider trades in stocks, which are also instant trades. Is this different?

  • Wei Dai

    >As a result, owners are induced to limit how far they set prices below their actual values both by the prospect that sincere buyers will arrive who sincerely value the property at more than their declared price, and also by speculators looking to profit from underbids. This means that for any given fee rate, declared values will be more honest. We can thus set fees to lower levels than we otherwise might and still get good allocative efficiency. Maybe a 1% fee would be good enough, which is in fact roughly a typical level of property taxes today.

    Robin, I think you got this part backwards. At lower-than-optimal Harberger tax rates, people have incentives to self-assess values that are too high whereas at higher-than-optimal Harberger tax rates, people have incentives to self-assess values that are too low. (See page 6 of the technical paper where the authors talk about this.) Since speculators protect against underbids (too low values), we can set fees *higher* than we otherwise might and still get good allocative efficiency.

    • http://overcomingbias.com RobinHanson

      That sounds right.

  • Wei Dai

    In real estate there are two kinds of owners, those who want to sell at the current market price (e.g., because they got a new job and have to move), and those who are only willing to sell at a substantial premium above market price (e.g., for sentimental reasons or because they just bought the house at market price and don’t want to incur the costs of moving again unless they’re compensated for that). The allocatively efficient Harberger tax rate is the one where at equilibrium, the induced probability of sale equals the tax rate (see page 6 of technical paper), but the probability of sale is going to be very different between these two groups of owners. Very few people (aside from a small number of infrastructure / real estate developers) would be willing to buy at the prices posted by the second group, so the probability of sale from their perspective would be very nearly zero. Proponents of the Harberger tax don’t seem to have acknowledged or addressed this issue.

  • Nicholas Weininger

    How much of the efficiency benefit of this could be achieved by a version that exempted primary residences? If the answer is “most” or even “a large chunk” then I strongly suggest that this is the right keyhole solution. Almost all the opposition to this is likely to center around the case of primary residences, and you can then more easily push the argument for stability rent externality-internalization for primary residences (which I agree with in principle) through the ordinary mechanism of setting residential property taxes to reflect market values.

    The idea that you can’t actually securely own your own home, that anyone may force you to sell and move all your stuff on a few months’ notice at any time, and that reducing this risk efficiently depends on understanding the dynamics of the real estate market, is just going to be too terrifying to the extremely powerful caucus of existing homeowners. It’s instinctively terrifying to *me* and indeed much more so than the thought of a large increase in my property taxes, and I am more philosophically sympathetic to the argument than 95% of homeowners are ever going to be. Counterarguments about how there are already risks of losing your home to fires etc are not comparing equivalently-salient or equivalently-uncertain things. The risk of fire is something that you can actuarially analyze and understand far more easily than the risk that somebody who happens to really want your house– or a speculator who understands the mechanisms much better than you do– will swoop in and force you to sell, and it doesn’t change in the same ways.

    • Nicholas Weininger

      To continue on these themes:

      1. A big part of the value of stability is the reduced cognitive load from not having to follow market prices all the time. People would at a minimum want insurance that allows them to effectively outsource this to someone else, i.e. they would pay a fee to have someone with a good reputation for judging these things accurately advise them periodically that they should reset their declared value to X to have a reasonable degree of assurance of not losing their house.

      But I don’t see how to enable that insurance without enabling people to effectively privatize the entire system, by saying: buy our insurance, and you can set your official declared value at one cent, but in reality if anyone tries to buy your house for less than $5M we will outbid them, buy the house from you, then sell it right back to you for the money we just paid you. In this model the insurers basically become tax farmers for property taxes, no?

      2. The pollution externality argument may work as a moral principle but I don’t think it’ll work as political practice because the direct incidence is so different. The social cost of having strong rights to stability is opportunity cost: for example, because I own my home and exclude others, someone else can’t take what might be a valuable opportunity to move in and live closer to their lucrative job. But the direct impact of that opportunity cost falls, not on the whole population (as in the case of broad-area pollution which more or less directly makes everyone unhealthier), but on the minority of strivers who take opportunities to dramatically change their lives to exploit economic opportunity. Yes, ultimately most people benefit from giving those strivers more scope to move valuable assets to more productive uses– but that’s an indirect benefit and a much harder argument to make.

      3. To tie these two threads together: some kinds of traditional property rights are popular in modern society for some of the same reasons that welfare state “social insurance” programs are popular, namely that they insulate people from disruptions to their lives caused by market forces which they don’t understand and instinctively find frightening. People likely overestimate how frightened they should be of these forces because of the combination of impersonality and agency of market actors: people fear what markets might do because they are not natural forces nor neighbors and friends, but associations of possibly-malevolent strangers. A similar psychological dynamic is probably at work in the overestimation of risks of terrorism.

      I don’t see in any of these arguments a clear strategy for combating this, as opposed to convincing the small minority of people who are already unusually receptive to both the efficiency and moral arguments for markets. I wish there were such a strategy, as it would make a lot of libertarian advocacy much easier!

  • Nicholas Weininger

    Disqus appears to have eaten my second comment yesterday; here’s another try.

    1. Suppose I’m a homeowner in this regime who doesn’t want to deal with understanding the market well enough to know what I should “bid” for my house’s stated asset value to have a risk of forced sale low enough to make me feel comfortable. I can pay a fee to someone of good reputation who makes some actuarial calculation and advises me on the “right” amount.

    But now that same person can also offer me an insurance contract as follows: pay me a larger fee, and bid one cent. If someone tries to swoop in and buy your house for less than $XM, I’ll outbid them, pay you, then sell the house right back to you for what you paid.

    That fee then becomes a privately-paid property tax and the insurer a sort of tax farmer. You still get the use-efficiency benefit of the system but now the government gets ~zero revenue. Is that avoidable? Is it worth avoiding? Am I missing some reason why that arrangement wouldn’t actually work?

    2. The pollution analogy is unlikely to be persuasive to anyone who hasn’t really internalized opportunity cost, which is to say, to the vast majority. Pollution typically imposes more or less direct costs on a whole population. But the fact that I, by owning a house in San Francisco, am reducing the opportunity others have to move here and take lucrative jobs, is at most directly salient to the small fraction of people who actually want to move here and take such jobs, even though giving that small fraction more opportunity would ultimately benefit most people.

    3. Tying these together: traditional property rights arrangements are probably popular in part for the same reason traditional “social insurance” arrangements are, namely that they provide a guarantee against people’s lives being disrupted due to market forces they don’t understand and instinctively fear, and impose opportunity costs that aren’t as salient in return. Probably people overestimate market risks for some of the same reasons they do terrorism risks, e.g. the risk comes from the actions of shadowy strangers, not from neighbors and not from natural forces. If there’s a persuasion strategy that will make people receptive to these sorts of radical market ideas I’d love to know, as it would make a lot of libertarian advocacy much easier.

  • http://cannabismuth.com/blog/ Cannabismuth

    This is preposterously over-complicated. You want people to constantly update their perceived values of everything they own (or at least everything substantial in value), come up with linking and bundling contracts, special assessments and the like? And then if they mess up or fill out the form wrong, someone can buy everything they own for a song?

    Come on, this is a set-up for a bad novel, not a real suggestion. If this post was one paragraph longer, you’d have added a sarcastic skunk as a witty sidekick.

  • guest

    Would it be possible for a friend and I sell our primary residence back and forth, queuing up thousands of years worth of allowed transfer time with effectively no tax?

  • Pingback: Recomendaciones | intelib

  • Riothamus

    Are we confident that this is reducing the information burden, rather than simply shifting it? From here:

    “Yes, this system adds some complexity to property law, but it can also greatly simplify many areas of law, including property tax assessment, eminent domain, necessity exceptions to contract, accident liability levels, corporate buyouts, and patent and copyright licensing”

    I notice that these are all problems that overwhelmingly affect larger entities like businesses and governments, all of whom maintain or have easy access to competent professional expertise in these areas.

    Compare the information load of the homeowner under the old and new systems. Previously they had to learn about market values; engage professional services in the form of real estate agents, attorneys and inspectors; arrange to actually vacate the premises in a timely manner. However, they only had to do this when they went shopping for a house, or when they were selling their house, which is a period of years between. Under the new system, these obligations are effectively continuous. Even if the domains are each simpler than they were before, having to stay on top of them constantly is a huge increase in the burden, and doesn’t change the requirement for outside expertise.

    Is there any sense of the limits on the amount of information we could expect the average property owner to be able to handle?

  • Pingback: Overcoming Bias : All Pay Liability