Tag Archives: Agents

Hating On Personal Equity

The New Yorker has new article called “Is Selling Yourself The Wave of the Future?”, purportedly on entrepreneurs Daniil and David Liberman efforts to finance their careers via equity (i.e., shares of future income) instead of debt or self-funding, and to entice others to do likewise. But like most New Yorker articles, most of its 8300 words are a profile with many personal details, with hardly any of the article actual discussing this idea.

But as I’ve often written on this concept, a concept close to others I’m fond of, let me take this chance to revisit the topic. In this article, I find five complaints voiced about financing careers vis equity:

Their model isn’t so much digging young people out of their predicament as replacing one kind of weight with another. The vulnerable are still vulnerable, and it remains a long way from the bottom to the top.

Yes, equity doesn’t eliminate poverty. But equity might still improve on debt or no funding, approaches that many vulnerable now use.

“Yes, if you’re the kind of person who wants to work at a job you love and it’s predictable how much money you’re going to make, it’s a bad instrument,” Sam Lessin, the venture capitalist, told me. “It works only when someone can squint and say, O.K., you’ll probably fail, but if you work we’re going to make a ton of money.

If the price of such instruments are set by market forces, I don’t see how they would be bad investments on average. Yes there are transaction costs to create equity, perhaps adverse selection in who sells them, and selling your equity can cut your incentive to work. But on the other side are two key gains. First, equity might fund good career investments that would not otherwise happen. And second, equity can help to align the incentives of advisors and promoters, as we already do now with most career agents.

(Note that in my favorite equity variation, wherein the government auctions off the rights to receive fractions of the stream of tax revenue that it would otherwise get from a taxpayer, there is no added disincentive to work, and in fact an improved incentive to work when that taxpayer wins auctions to buy their own revenue streams.)

Investors give money to promising youths—usually through middleman companies such as Upstart—in exchange for a percentage of their future incomes. The traditional knock against such schemes has been that they’re exploitative or worse, a form of indentured servitude.

This seem empty mud-raking slander. What exactly makes equity exploitive or bad? I think the following two complaints get to the heart of what most people really object to, as I’ve also heard them often when I’ve discussed related proposals:

If the young have to present themselves in a particular way to the older generations so that they will find their life trajectory appealing, I could totally see how there could be a social hierarchy you typically just have between benefactors and those who receive those funds. …

One economist told me he doubts that normal people, even with technical protections, could be free of shareholder influence. (“There is reason to expect that a system that starts out that way will evolve under pressure from investors,” he said. “We saw this with changes in bankruptcy law in 2005 that gave the holders of credit-card debt more power vis-à-vis credit-card debtors by making it harder to file for bankruptcy under Chapter 7.”) As most C.E.O.s know, not even success brings freedom from shareholder pressure.

That is, the key complaint is that whomever buys your equity might try to lobby you or your associates to influence your behavior. Or they might try to lobby the government for favorable treatment and powers. That is, they might ask you to agree to changes as a condition of their investment. Or as investors they might try to cosy up to your associates to get them to lobby you toward behavior they prefer.

Note that your associates, in addition to wanting to promote and help you, also have various ways that they want your behavior to change. And they already coordinate with each other to lobby you about these. Such associates include family, friends, lovers, employers, landlords, shared-club members, and business partners. Note further that we already allow you to borrow money, by which once strangers acquire a financial interest in both promoting and lobbying you re your future income.

Once we see that your debt owners, employers, and many other associates already want to promote and lobby you and the government re your behavior, I find it very hard to see how letting you sell shares in your future income adds much to this problem. Especially if we let you decide who if anyone can buy such shares. This seems to me more like a simple anti-capitalist instinct that just isn’t very sensitive to the specifics of this situation.

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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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Replace Govt As Career Agent

Agents for actors, musicians, and artists get 10-20% of their payments in order to advise, promote and negotiate on their behalf. Sports agents get 4-10%, while speaker agents get 20-30%. Headhunters get 18-25% of first year salary. The idea is simple: when someone gets a big fraction of your income, they have an incentive to increase your income. (In addition to reputation and repeat business incentives.)

True, you might not be willing to part with a big fraction of your income just to create such an agent. But it turns out that you already have a career agent who takes 1/4 to 1/3 of your income: your government. But while your government may sometimes pay for guidance counselors and jobs listings, overall they do a terrible job as your career agent. They do far far less than would a private agent paid that big a fraction of your income.

However, it would cost very little to transfer this career agency role from your government to a private actor. All we need is for the government to auction off the right to be paid the amount in taxes that you will pay to the government. The government is no worse off; it could use that auction revenue to pay off its debt, or to buy stock index funds. The auction winner gains strong incentives to increase the taxes you pay, such as by helping you to earn more money. And investors gain a new asset class to diversify over.

Notice that you’d be under no obligation to listen to agent advice, or to accept any of the deals they find for you. And they’d have no powers to enforce or change taxes, or to prevent the government from changing taxes. Though they might report you if they found you cheating on your taxes. This is nothing like tax farming. Seems crazy to me to claim (as many do) that they’d illegally censor you or threaten to break your kneecaps.

Note also that this asset is worth less to someone who can’t get you to listen to or work with them. So the asset will tend to be traded to someone who can get you to listen, if any such person exists. So you’d have a lot of influence over who held the asset. This asset on you could be held by a parent, school, employer, or even by you yourself.

Yes, this agent doesn’t weigh all of your interests the way you do; you’d pick fun over work more often than would they. But such a conflict also exists for all of the other kinds of career agents mentioned above, and for the other agents in your life, such as your lawyer, sport coach, priest, parent, and teacher. They can all help you even though you know to not just believe everything they say. Note also that some of these agents, e.g., parents and teachers, are assigned to you; you don’t get to pick them.

To avoid problems with auction bidders fearing that others know more than they, best to do the auction early, such as at birth, when few know anything. And to tell bidders then some basic stats on the parents. Individual auction prices don’t need to be made public, though seems fair to tell the parents of kid whose rights are sold. (And maybe also to give parents a cut.) There should be a way to contact the asset holder of a person, so one can offer to buy that asset.

You might fear that asset holders would lobby to increase taxes, but they are easily outvoted by ordinary taxpayers. Conversely, you might fear that governments would lower tax rates to please voters while hurting asset holders. But governments would fear cutting revenue in new auctions; governments similarly don’t usually inflate to pay off bonds for fear of raising their cost of new bonds. These tax assets can function as well as does government debt, which is pretty well.

Yes, the risk of unpredictable changes to economic growth and tax rates would impose a risk premium on the cash that auction bidders would pay for these assets. But that’s much less of an issue if the auction itself is denominated in a risky asset, such as a stock index fund, instead of cash..

Yes, people might try to extort asset holders to sell their tax asset to them cheap via threatening to choose a tax-free life. But asset holders would likely call their bluff and just refuse to sell in such circumstances.

Yes, it makes sense to try to start first with small experiments, such as perhaps in a small nation. Maybe also do an experiment where only a random subset get their taxes sold at auction.

Added 8p: To avoid extortion scenarios, it might help to fix the tax system to cut situations where someone gains nearly the same value and consumption, but via very different personal lifetime taxes paid, merely by different formal approaches to what is treated how tax-wise.

Added 2July: 53% of my Twitter followers reject this proposal, including these two variations: let parents veto the auction at birth, and impose a Harberger tax on the assets, to make them more easily transferred.

Added 16Sep21: I suggest there’s even more value from having you be your own career agent, to lower your marginal tax rate.

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