This strategy would also, if developed further, make legislative bodies impotent. If everyone could smooth out their risk profiles by betting on negative outcomes, then the only effect of any proposed legislation on people’s behavior would be a transfer of wealth reflecting individuals’ indifference curves (i.e. the outcome sets they are indifferent between). New laws would lose most of their ability to change behavior.
This strategy would also, if developed further, make legislative bodies impotent.
How so? If someone recieves money when their current business becomes illegal, this doesn’t mean that they’ll carry on in the business, ignoring the change in law. In fact, it makes it easier for them to cease their current business immediately.
I may be missing some major point, so if so clarify, but it seems to me that this would in no way decrease the effectiveness of legislation at discouraging actions after it was enforced: all it would do is decrease the effect of THREATENED legislation (that has not yet been passed).
Okay, my thinking is basically that the insurance mechanism’s predicted effects feed back to the legislature-level, not necessarily the outlaw-level (though it can do that too—see the end of this comment).
In other words, in anticipation of this insurance-like reallocation, a legislature will find most of its potential laws less appealing. For example, if they want to ban something, they are doing it to reward a politically-powerful group and punish one that is less so. They want, e.g. “lots of wodget-sellers jailed so that honorable wodget-avoiders don’t have to deal with the wodget menace”. With the insurance mechanism, however, they can’t get that by itself; at best, they can get that plus a large transfer of wealth from the “good guys” to the “bad guys”—which is much less politically appealing.
Even if it doesn’t have that influence on the legislature, and they persist in such bans, the general effect of the insurance (transfer of financial resources from those supporting [in this case] the ban to those opposing it) may not mean that the sellers of the banned product “take the money and run”. It could just as well mean they can raise better barriers against law enforcement (like what happened with alcohol dealers under prohibition, who could make enough to disrupt the laws against them without them being overturned), allowing them to continue in their work.
So perhaps “impotent” is an exaggeration, but it definitely weakens the power of the legislature through several effects (legislators playing the prediction markets, political unattractiveness of enriching the target of the laws, and the shift in financial power each law brings).
They want, e.g. “lots of wodget-sellers jailed so that honorable wodget-avoiders don’t have to deal with the wodget menace”. With the insurance mechanism, however, they can’t get that by itself; at best, they can get that plus a large transfer of wealth from the “good guys” to the “bad guys”—which is much less politically appealing.
If the ban on wodgets is expected to be binding, then a proposed ban on wodgets with probability p of being enacted does decrease the expected value of wodget-selling capital. Wodget-sellers can choose whether to cut their losses by taking out insurance, keep their risk exposure unchanged or even reverse their exposure by betting more than their existing interest—but they cannot get a free lunch unless they have magical foreknowledge of future events.
Yes, to the extent that wodget-sellers trade their risk with wodget-avoiders, the political positions of either will shift towards neutrality. But this will hardly make legislatures useless.
As for your suggestion that having more money could help against enforcement, well, let’s put it in decision-theoretical terms: do you honestly think that transferring money from the possible world in which selling wodgets is legal to the possible world in which doing so is illegal is actually a sound investment? Because this is what the transaction boils down to.
A genuine problem with political prediction markets is that niche speculators can rent-seek by manipulating the legislation process. I don’t have a real answer to this, but it seems to be a self-limiting problem: e.g. a speculator who tries to manipulate the legislature into enacting some law and fails has wasted effort in addition to losing his bet.
I appreciate your explanation. It certainly adds more dimensions, and while the effect would be even more complicated, and I don’t want to even try to model it (with my limited economic and political knowledge) I now understand your position.
Referring to Keven as “User:Keven” has become somewhat of a convention. Initially used by Clippy but adopted by the professed humans too. The idiosyncracy appealed.
Um, this is wrong. The effect of insurance on behavior is called “moral hazard”, and it is a market imperfection. People who contract for insurance will be best off if they minimize resulting changes in behavior, and insurance contracts with severe moral hazard issues are simply not traded. (For instance, unemployment insurance is not traded on the private market.)
That’s only true for cases where the insured has significant influence over whether the insured event happens. That’s not the case for legislation, unless you’re an influential legislator or lobbyist; and, to the extent that moral hazards cause a problem there, it still works to make the legislature impotent (since they can no longer trust each other not to use their votes to game the prediction market).
And I think you’ve significantly overstated the impact of moral hazard problems: there are numerous instances of insurance contracts where the insured has significant control over whether the insurer must pay out—the solution is to make sure the payout doesn’t fully return the insured to their indifference curve (e.g. through deductibles), not for the market to fail to exist. Otherwise, how could there even be liability insurance?
EDIT: Easter egg: see if you can find an internet article by me arguing the opposite of what I’ve said here. Don’t embarrass me further by posting it when you find it.
What’s “the insured event” here? If it’s the enactment of legislation, then yes, it is possible in principle that insurance will affect the market for laws, by shifting risk to those most able to bear it. If it is the behavior of people who would be affected by legislation (say, a breach of some kind which gives rise to liability), then my above point stands: the “impact of moral hazard problems [is] reduced” iff insurance does not change behavior much.
Liability insurance only covers negligence and strict liability, not intentional torts; and insurers seek to minimize their payouts by (a) imposing deductibles and (b) monitoring their clients’ observable precautions. In some cases, insurance will actually enhance the incentives inherent in tort law, by shifting part of the risk of negligence to a third party which can specialize in monitoring against it; but this is a matter of technical efficiency.
This strategy would also, if developed further, make legislative bodies impotent. If everyone could smooth out their risk profiles by betting on negative outcomes, then the only effect of any proposed legislation on people’s behavior would be a transfer of wealth reflecting individuals’ indifference curves (i.e. the outcome sets they are indifferent between). New laws would lose most of their ability to change behavior.
(Btw, why “User:Kevin”?)
How so? If someone recieves money when their current business becomes illegal, this doesn’t mean that they’ll carry on in the business, ignoring the change in law. In fact, it makes it easier for them to cease their current business immediately.
I may be missing some major point, so if so clarify, but it seems to me that this would in no way decrease the effectiveness of legislation at discouraging actions after it was enforced: all it would do is decrease the effect of THREATENED legislation (that has not yet been passed).
Okay, my thinking is basically that the insurance mechanism’s predicted effects feed back to the legislature-level, not necessarily the outlaw-level (though it can do that too—see the end of this comment).
In other words, in anticipation of this insurance-like reallocation, a legislature will find most of its potential laws less appealing. For example, if they want to ban something, they are doing it to reward a politically-powerful group and punish one that is less so. They want, e.g. “lots of wodget-sellers jailed so that honorable wodget-avoiders don’t have to deal with the wodget menace”. With the insurance mechanism, however, they can’t get that by itself; at best, they can get that plus a large transfer of wealth from the “good guys” to the “bad guys”—which is much less politically appealing.
Even if it doesn’t have that influence on the legislature, and they persist in such bans, the general effect of the insurance (transfer of financial resources from those supporting [in this case] the ban to those opposing it) may not mean that the sellers of the banned product “take the money and run”. It could just as well mean they can raise better barriers against law enforcement (like what happened with alcohol dealers under prohibition, who could make enough to disrupt the laws against them without them being overturned), allowing them to continue in their work.
So perhaps “impotent” is an exaggeration, but it definitely weakens the power of the legislature through several effects (legislators playing the prediction markets, political unattractiveness of enriching the target of the laws, and the shift in financial power each law brings).
If the ban on wodgets is expected to be binding, then a proposed ban on wodgets with probability p of being enacted does decrease the expected value of wodget-selling capital. Wodget-sellers can choose whether to cut their losses by taking out insurance, keep their risk exposure unchanged or even reverse their exposure by betting more than their existing interest—but they cannot get a free lunch unless they have magical foreknowledge of future events.
Yes, to the extent that wodget-sellers trade their risk with wodget-avoiders, the political positions of either will shift towards neutrality. But this will hardly make legislatures useless.
As for your suggestion that having more money could help against enforcement, well, let’s put it in decision-theoretical terms: do you honestly think that transferring money from the possible world in which selling wodgets is legal to the possible world in which doing so is illegal is actually a sound investment? Because this is what the transaction boils down to.
A genuine problem with political prediction markets is that niche speculators can rent-seek by manipulating the legislation process. I don’t have a real answer to this, but it seems to be a self-limiting problem: e.g. a speculator who tries to manipulate the legislature into enacting some law and fails has wasted effort in addition to losing his bet.
I appreciate your explanation. It certainly adds more dimensions, and while the effect would be even more complicated, and I don’t want to even try to model it (with my limited economic and political knowledge) I now understand your position.
Referring to Keven as “User:Keven” has become somewhat of a convention. Initially used by Clippy but adopted by the professed humans too. The idiosyncracy appealed.
I think Clippy refers to everyone as “User:[username]”, but since he refers to Kevin especially often, that’s what’s most remembered.
This.
Why was this voted down? It seems to be the most efficient way to answer the question, and necessary because it was MBlume’s use that was questioned.
There’s more than one Kevin on the site… it seems slightly presumptuous to just call me “Kevin” in posts.
That with a link on first mention would do the trick.
Um, this is wrong. The effect of insurance on behavior is called “moral hazard”, and it is a market imperfection. People who contract for insurance will be best off if they minimize resulting changes in behavior, and insurance contracts with severe moral hazard issues are simply not traded. (For instance, unemployment insurance is not traded on the private market.)
That’s only true for cases where the insured has significant influence over whether the insured event happens. That’s not the case for legislation, unless you’re an influential legislator or lobbyist; and, to the extent that moral hazards cause a problem there, it still works to make the legislature impotent (since they can no longer trust each other not to use their votes to game the prediction market).
And I think you’ve significantly overstated the impact of moral hazard problems: there are numerous instances of insurance contracts where the insured has significant control over whether the insurer must pay out—the solution is to make sure the payout doesn’t fully return the insured to their indifference curve (e.g. through deductibles), not for the market to fail to exist. Otherwise, how could there even be liability insurance?
EDIT: Easter egg: see if you can find an internet article by me arguing the opposite of what I’ve said here. Don’t embarrass me further by posting it when you find it.
What’s “the insured event” here? If it’s the enactment of legislation, then yes, it is possible in principle that insurance will affect the market for laws, by shifting risk to those most able to bear it. If it is the behavior of people who would be affected by legislation (say, a breach of some kind which gives rise to liability), then my above point stands: the “impact of moral hazard problems [is] reduced” iff insurance does not change behavior much.
Liability insurance only covers negligence and strict liability, not intentional torts; and insurers seek to minimize their payouts by (a) imposing deductibles and (b) monitoring their clients’ observable precautions. In some cases, insurance will actually enhance the incentives inherent in tort law, by shifting part of the risk of negligence to a third party which can specialize in monitoring against it; but this is a matter of technical efficiency.