miscellaneous factZ

See summary analysis of the literature on corruption: Considering Corruption as well as the Political Honesty paper.

Partially inspired by p.6 of Why Information Security is Hard: An Economic Perspective.

Basic insight: PA problems are all about information not being available to the principal (but being available to the agent). This is clearly a sensitive issue in most real-world situations. Getting people to be honest about this is going to be difficult.

…. One of the tasks of transaction cost economics is to asssess purported bureaucratic failures in comparative institutional terms.

The basic argument is this: it is easy to show that a praticular hierarchical structure is beset with costs, but that is neither here nor there if all feasible forms of organization are best with the same or equivalent costs. Efforts to ascertain bureaucratic costs that survive comparative instiutional scrutiny are reported elsewhere (Willimson, 1975, chapter 7; 1985 chapter 6), but theser are very provisonal and preliminary. Although intertemporal transformations and complexity are recurring themes in the study of bureaucratic failure, much more concerted attention to these matters is needed.

Source: Transaction Cost Economics and Organization Theory; Williamson, Oliver; in dosi_ea_1998 p.29

The inefficiencies that result from compromise are illustrated by the design of the Occupational Safety and Health Administration (OSHA), (Moe, 1990, p.126):

If business firms were allowed to help design OSHA, they would structure it in a way that it could not do its job. They would try to cripple it.

This is not a hypothetical case. Interest groups representing business actually did participate in the design of the OSHA ….. [and] OSHA is an administrative nightmare, in large measure because some of its influential designers fully intended to endow it with structures that would not work.

<p>
To be sure, private sector organization is also the product of compromise. Egregious inefficieny in the private sector is checked, however, by competition in both product and capital markets.
</p>

Source: ibid p.30

About

Review of John Braithwaite, Peter Drahos, Information Feudalism, Earthscan 2002. Read spring 2004.

Notes and Comments

1. Didn’t think much of this book.
2. Style was too polemical and wasn’t enough evidence to substantiate their claims. Much of the argument proceeded via an ad hominem approach:
   1. corporations like IPR
   2. corporations are nasty and selfish
   3. so IPR are bad (nasty and selfish)
3. this neglects a central point of capitalism: selfishness can work [note 1 below]. Capitalism works fine if people are loving and altruistic BUT IT ALSO works fine if people aren’t. The whole point of IPR is to incentivize innovation by allowing people to appropriate some of the returns. The central question is what is the optimal level of appropriation that you want not whether it is good or bad. And of course people want to freeload (generally those who aren’t doing the innovating) but if you allow that to go too far you end up with a tragedy of the commons. For freeloaders to freeload (pardon the loaded language) something has to be there to copy. But why did someone go to that effort in the first place? There are many reasons including the love of creation etc but for a lot of innovations/inventions, particularly those requiring significant investment, this is unlikely to be enough.
4. To be fair B&D know this: ‘Efficiency in the case of intellectual property rights is generally thought to involve a balance between rules of appropriation and rules of diffusion. Overly strong intellectual property rights leads to the problem of excessive monopoly costs of intellectual property rights, whereas weak protection leads to the problem of excessive free-riding and therefore underinvestment in innovation. The difficult trick for any legislature is to find a balance between rules of appropriation and rules of diffusion.’ [p. 13]
5. But they never really address this thorny issue head on but attempt to get at it indirectly by arguing that an imbalance in bargaining power and the shady shenanigans of the multinationals imply that the resulting outcomes MUST be biased in the wrong direction (see e.g. following paras on [13] to one just cited + rest of the book).
6. This may be an attractive route but it has many pitfalls. We have assumed we can’t even accurately work out the socially optimal level of patent protection in the first place. But then it is going to be more difficult to work out (with appropriate considerations for informational and transactional constraints) where on this unknown scale of optimal protection we end up with the current distribution of bargaining power.
7. Nevertheless it possesses attractions. If producers and consumers have different interests and producers have all power we are not likely to end up with the optimal outcome.
8. ‘In order for democratic bargaining to take place among sovereign states, at least three conditions need to obtain. First all relevant interests have to represented in the negotiating process. … (This …. does not entail the participation of all at every stage …) Second, all those involved in the negotiation must have full information about the consequences of various possible outcomes …. Third, one party must not coerce the others.’ [14]
9. ‘Ours is not an anti-intellectual property tract. It is an argument against the domination of the intellectual property standard-setting process by a corporate elite that, for close to a century, has played the knowledge game with great social costs.’ [15]
10. Comments such as previous seem very reasonable. However they are let down by shoddy reasoning and a lack of evidence. The very strength of these claims makes one cautious. How does on calculate the social cost? What level of innovation and diffusion would their have been under a different regime. This is not to argue that things should not be different. I personally think they should but a far more careful analysis is needed. A classic example of slipshod analyis is provided by: ‘The truth is that current intellectual property regimes do a very poor job of chanelling rewards (and therefore creating incentives) to creators. The bulk of intellectual property rights are not owned by their initial creators but by corporations that acquire intellectual property portfolios through a process of buying and selling, merger and acquisition.’ [15] This is a complete non-sequitur and all too representative. The whole point is that there is a market system for innovation in which innovations are bought and sold. The personal ownership by the innovator is no important to the optimality or not of the system than a requirement that you should only eat food you have grown yourself. Alienation from the product of your labour is irrelevant. Whether you get paid and how much is what matters.

[1] ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love.’ Adam Smith, … Wealth of Nations, Book One, Chapter 2: Of the Principle which Gives Occasion to the Division of Labour.