Balkinization  

Saturday, October 28, 2006

Commodifying Commitment

Ian Ayres

One of the critiques of commodification is that putting prices on certain activities may drain all the joy out of life. But in this Forbes column, Barry Nalebuff and I suggest that in certain contexts this kind of commodification effect might be a good thing. Commitment contracts might help people lose weight or quit smoking. Instead of paying $500 a year to use Weight Watchers, you might be better off to pay $1000 at the beginning of the year and then have Weight Watchers pay you $10 every week that you show up to be weighed.

Commitment contracts could even promise to pay very substantial interest rates IF you promise to lose and keep weight off.

The commitment idea could also help people be better eco-warriors. Environmentalists tell us to get off our butts and go across the room to turn off the unused light, because the electric company doesn't charge the true social cost of wasted electricity. But the electric company could pay you $1000 at the beginning of the year, if you promised to pay more for kilowatt hours. Now you'll go across the room because it really will cost you a lot for extra electricity.

Instead of GM buying down the price of gasoline to $1 per gallon if you pay it up front by buying a car, Toyota or Ford (or even GM) should offer to pay you if you'll agree to increase the price per gallon that your willing to pay for gas.

Friends and family members have been helping each other with commitment contracts for a long time. The cursing jar, and private weight loss bets are just the tip of the iceberg. But there's no good reason why entrepreneurs or non-profits shouldn't mass-market commitment contracts to help us be what we want to be.

Comments:

You're kidding about Weight Watchers, right? Even if forced into such a committment contract, who in their right mind would fulfill the terms? Spend 100 weeks listening to fat people drone on about their problems and being publicly humiliated about being overweight? Just to get back the lousy ten bucks you've already sunk? Fat chance. Pun intended.

The problem with so many economic theories and models is that they completely discount any human motives except for money. Would it surprise you to learn that the majority of people are more highly motivated by things OTHER than money?

Marian Contrarian, Ph.D.
 

I don't see a problem with two free parties agreeing to enter into this kind of contract. However, if the parties are not free to choose to enter into this kind of contract as say the contract were imposed upon a party by governmental fiat. Then the concept just boils down to nothing more than a tax, and increased taxes are not a good thing.

Could you clarify for us whether you are merely discusing a form of a purely voluntary contract or are you advocating this kind of tax disguised as a novel contract concept be imposed involuntarily upon people by the coercive power of government?

Asks the "Dog"
 

In a purely economic framework, this makes a lot of sense. Increasing the marginal cost of something makes you use less of it. Increasing the marginal gain for doing something makes you use more of it. Adding an up-front transfer makes the system (potentially) revenue neutral. I could see something like this working quite well for gas/energy usage. Despite all the complaints about gas prices, the cost is absurdly low when you look at what sorts of uses remain profitable.

This sort of thing might even work for long-term personal commitments like going to the gym or weightwatchers, although I think there's an important psychological twist there. My (very poor) understanding of psychology tells me that a material benefit ($10) can sometimes supplant the original, less tangible benefits (like looking better and health in the case of weight watchers). If that's the case, then such a scheme could actually decrease someone's net motivation, particularly if the weekly $10 checks dry up.

It's a very cool idea, though.
 

Well, this is close to the point of Mark Lepper's classic work on motivation - though it is framed in terms of intrinsic and extrinsic motivation, rather than tangible vs intangible benefits.
However, that research concerns normally enjoyable activities (kids interested in playing with fun new toys lost interest and stopped playing with them after they began to receive rewards for it).
 

“But the electric company could pay you $1000 at the beginning of the year, if you promised to pay more for kilowatt hours.”

I suppose if such a program were imposed on all residential customers of an electric company, those customers who consumed less would end up paying a lower effective rate per kilowatt hour than those who consumed more. Assuming everyone has to use some electricity, it would be similar to offering X number of kilowatt hours free with some fixed rate for everything over that.

But, if the regular pricing plan were also available, it would really be pretty easy to determine the level of consumption above which the regular plan would offer a lower effective price per kilowatt hour. Because the electric company would act to maximize its profit, the program would only exist if enough customers were expected to guess wrong and effectively pay more per kilowatt hour than they would under the regular plan. (Something has to offset the effect of conservation and the lower price paid by those who succeed in consuming very little.)

I think this kind of cell phone-style pricing plan that's predicated on wrong guesses by consumers might not be the best way to motivate people to conserve.
 

You know you're in love when you can't fall asleep because reality is finally better than your dreams.
Agen Judi Online Terpercaya
 

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