More/General Agents in NBER

For many years now I’ve suggested solving various social problems via competing market-selected agents whose future financial payments track some kind of welfare; they get paid more when good things happen, and less when bad things do. For example,

I’ve previously suggested that people choose health agents, who pay for and choose medicine but who lose lots of money if their clients become disabled, in pain, or die. I’ve also suggested that people choose crime vouchers, who must pay for cash fines when their clients are found guilty of crimes, but who have client-voucher contracts able to set client co-liability and to choose punishments and freedoms of association, movement, and privacy. I’ve also suggested having agents who insure you against hard times, career agents who get some fraction of your future income, and that parents get such a fraction to compensate for raising you.(more; see also and)

On Monday, economist Erzo Luttmer posted an NBER working paper, Can Fiscal Externalities Be Internalized?, that is remarkable for two reasons. First, he makes proposals quite similar to mine. And second, his paper is almost entirely qualitative, with almost no math. The reason I’d given up on trying to publish my related proposals in econ (or other) journals is that it seemed clear to me they wouldn’t consider qualitative discussions without supporting game theory or stat analysis. Is that world changing, or do only top elites quality for this exception?

What I call “agents”, Luttmer calls “sponsors”:

Each individual’s fiscal externalities, both positive and negative, are transferred to a private party or “sponsor.” Thus, the sponsor receives the tax revenue that the individual generates, while at the same time the sponsor must reimburse the government for any expenses incurred for this individual. The sponsor pays a predetermined sponsor fee (possibly negative) to the government that is equal to the individual’s expected fiscal externalities. The sponsor has no coercive power over the individual. Individuals, if they choose, are free to ignore their sponsor.

Later he expands his proposal to include other externalities:

Government can incentivize sponsors to help the individuals they sponsor stay alive by counting each year an individual is alive as a positive fiscal externality of a given amount. … government could enact a policy that makes a sponsor also responsible for negative non-fiscal externalities from crimes committed by individuals it sponsors.

That’s as much detail as Luttmer gives re what specific externalities he wants to include. Instead of creating many particular agents for particular issues, he instead seems to want to give each person one maximally general agent.

And instead of offering the simplest possible version of his proposal, Luttmer instead makes it more complex to deal with problems he foresees. For example, he worries about excess sponsors “marketing”, and so proposes regulation:

Sponsors may use marketing techniques to induce people to focus on the material rewards of working harder, to the point that people become worse off … government can regulate how sponsors may interact with individuals … [or] could allow only non-profit organizations to serve as sponsors.

Also, while Luttmer wants each sponsor to max welfare regarding each of their clients, he designs a complex payment and selection process exactly to prevent sponsors from having a shared interest in maximizing welfare overall. As then they might try to lobby the political system to make society more efficient, which would be unacceptable “political interference” by capitalists:

The sponsor fee equals the average fiscal externality of individuals in group g that were matched to other sponsors, plus a group-specific adjustment term. … This insulates sponsors from shocks that affect all individuals in a given group [and] … limits incentives for political interference in the determination of fiscal externalities. … because such policy choices affect the fiscal externalities of both the individuals sponsored by the sponsor in question and those sponsored by others, the net effect on a sponsor’s compensation is zero on average.

For reasons I don’t fully understand, Luttmer also adds complexity to get random matching:

Government … procedure for matching sponsors to individuals must ensure effective competition between sponsors. … and ensure that marginal sponsors do not receive rents. … One way … is to randomly match individuals, from a broadly defined group to sponsors interested in that demographic … Matches are permanent, but a sponsor may transfer the sponsorship to another sponsor if both sponsors agree. … If the government accepts a proposal, only a randomly assigned fraction (say half) of the proposed group gets matched to sponsors. Individuals not matched to a sponsor form the control group … provides the control group for a randomized evaluation of the welfare benefits of the sponsors’ interventions.

I prefer mechanism simplicity, am not worried about marketing, and would love to see agent/sponsors lobbying for more efficient policies. So I’d go with a simpler auction, perhaps give the target client more control over the process. But I’m happy to see Luttmer (unknowingly) join me in suggesting that we consider more kinds of, and/or more general versions of, agents.

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