Futarchy To Pick Ad Agency
One big obstacle to getting firms to adopt futarchy is this: firm execs are reluctant to open up to wider review decisions that they feel they “own”. Like who to hire or fire, or whether to start or end projects. It should thus be easier to get them to consider futarchy for choices that they must negotiate with outsiders, as they less “own” such choices. Like choices of when their firm gets more how much more investment, and at what terms.
Prospects seem even better if such choices negotiated with outsiders involve kinds of expertise that firm execs usually lack, but which are available in many potential market speculators. An especially attractive option here is: choice of ad agency.
Firm execs usually know little about choosing ads, and far less than do ad agencies. To induce ad agencies to reveal what they know, it would make sense to transfer the risk of ad choice from firms to ad agencies, via incentive contracts. That is, pay agencies in proportion to increased sales of the product lines they advertise. And to reduce the noise and risk of this, one could aggregate choices over many product lines over a long time.
Alas, such contracts are rare. In part because the ad agency would then be at the mercy of many product related choices made by the firm. But mostly because ad agencies tend to be far smaller than are the firms they supply, making the risk from such incentive contracts quite large compared to their size. And pushing ad agencies to be far larger would apparently come at big costs in their efficiency and effectiveness. Firm execs mostly prefer instead to make their own poor judgements, and pay ad agencies per hour worked or per ad plan, independent of ad performance.
Under a simple futarchy system for ads, the firm would choose a scope of product lines and time duration, and a value per product sale. The firm would then invite bids from ad agencies to do ads for those lines over that duration. Each bid would specify its cost to the firm, or how that cost would be calculated, and any constraints on firm behavior re these product lines. Firm associates, competing ad agencies, and other authorized speculators would then trade in markets that estimate firm value realized (sales value minus ad cost) conditional on which ad bid is chosen.
Yes, ad agencies would be tempted to manipulate these markets, which would be an added cost to them as such trades lose money on average, even though they wouldn’t bias prices on average. And yes, there would be added costs to subsidize these markets. But these added costs should be far less than that in requiring ad firms to get large enough to take on direct incentive contracts. And choices here should be far more informed than when firm execs make them.
Notably, "pay for performance" (compensation porportional to measured value add) is much more common in online ads. I think this is likely a combination of better measurement tools and 3rd party ad platforms that can make strong promises about low-noise performance measures. This is because 3rd party performance measurers don't have the same incentive conflicts as agencies evaluating themselves (or internal ad providers measuring outsiders' performance!).
The firm has a fixed, large amount of risk involved in selling their product. Pay-for-performance either:
1. makes the ad agency take on all of that risk, which carries a high risk of sinking the ad agency if it is much smaller than the hiring firm and the product does poorly,
or,
2. makes the ad agency take on only a small fraction of the risk, say 10%. This is safer for the ad agency, but it means that if the ad agency could spend $1 more on their campaign to increase the firm's profit by $9, it's not in the ad agency's interest to do it. (Since the ad agency only gets $0.90 of that $9, for a net loss of $0.10).
Do you think your futarchy solution somehow gets around this? What fraction of the risk would the ad agency take on, what fraction would the original firm take on, and what fraction would other investors in the prediction market take on?