Public goods contributions as market signals

Last week I taught my undergraduate class the Mancur Olson model of groups and public goods.

[Roughly speaking, if you want selfish people to contribute to public goods (projects that everybody benefits from whether he contributes or not), you need to create some private incentive — something you don’t get if you don’t give — to encourage them. Since political outcomes are public goods to the groups that favor them, the groups that succeed best in overcoming their “free rider” problem by creating private incentives for public-goods contributions will, other things equal, prevail politically.]

Tomorrow we’re going to talk about the market signaling idea invented (in its contemporary form) by Mike Spence.

[If some person or institution is trying to select items with certain not-directly-or-easily observable characteristics — say, high-quality products to buy or smart and diligent people for employment — and the potential “choosees” want to get picked regardless of whether they have those characteristics or not, everyone is going to try to pretend to have those characteristics. So you can’t just ask, because talk is cheap. But if there’s some readily visible characteristic that is easier or cheaper to acquire if you have the characteristic in question — say, a college degree that is easier to get if you’re smart and diligent — that secondary characteristic will serve as a signal of the primary characteristic, and people will invest in acquiring the secondary characteristic for its signaling value even if its intrinsic value is low or even negative. That’s how evolution created the peacock’s tail.]

It hadn’t occurred to me until I started to prepare the lecture that the two models are linked: one form of private reward for public goods contributions is reputation, and such reputational effects will be enhanced when the level of contribution becomes (either naturally or through some artifice) a signal of some valued characteristic. That’s how law reviews extract so much tedious, unpaid labor from their editors.

Of course I already knew the principle that if you want a dirty job done right you need to make doing it an honor, but the signaling structure of the transaction came as a blinding flash of the obvious.

Can anyone point me to the paper (which must surely exist) where this model is worked out?

Update Here’s another way to frame the question: Under what circumstances will Veblenesque conspicuous consumption, and its analogues outside the realm of pure consumer behavior, lead to making actual public goods contributions, rather than mere waste?

Parallel problem: How to design credentialing processes so they involve building actual human capital in addition to the value of the credentials as signals.

In each case, you’re hoping to align the process by which people (or insitutions) make themselves look good to others with a process of creating actual public value or building real human capital. There’s nothing natural about such alignments.

Update A helpful reader points me to this paper by Eric Smith, Samuel Bowles, and Herbert Gintis, which uses signaling within the context of sexual selection and coalition formation as a general explanation for the development of altruistic behaviors through evolution.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

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