How have real estate agents kept commissions high? More on steering, by Barry, Fried, and Hatfield,

 Here's a paper that offers one channel for how residential real estate commissions have been maintained at a more or less constant percentage of house prices, while those prices have risen and while information about houses for sale has become more readily available.

Barry, Jordan and Fried, Will and Hatfield, John William, Et Tu, Agent? Commission-Based Steering in Residential Real Estate (October 9, 2023). Available at SSRN: https://ssrn.com/abstract=4596391 or http://dx.doi.org/10.2139/ssrn.4596391

Abstract: "Real estate agents are required to serve their clients’ best interests. However, policymakers have long suspected that buyer agents steer their clients away from properties that offer low buyer agent commissions. They are particularly concerned that steering is a key reason why agent commissions have remained high in the internet era, even as commissions in other industries have plummeted. Analyzing a new dataset, we provide the first systematic, nationwide evidence that buyer agents do in fact steer clients away from properties that offer low buyer agent commissions.

"Buyer agents play an important role in helping their clients find homes. We hypothesize that buyer agents may skip over low-commission homes in favor of high-commission homes when choosing which listings to forward to their clients. If so, low-commission listings would tend to garner fewer page views on public real estate portals like Zillow and Redfin. To test this theory, we track the number of page views that individual listings receive on Redfin. All else being equal, we find that low-commission listings receive fewer page views. This effect is most pronounced for listings with the lowest commissions, but even listings with commissions that are slightly below the going rate receive significantly fewer page views.

"We also find evidence that this steering has meaningful economic consequences. Homes with lower buyer agent commissions take longer to sell and are less likely to sell at all. Again, these effects are largest for the listings with the lowest commissions, which take 33% longer to sell nationwide. In a typical geographic market, our best estimate is that these lowest-commission properties face a 75% greater risk of not selling at all. Here too, even commissions that are slightly below the going rate are associated with longer sale times and higher risk of a failed sale.

"We explore the implications of our findings with respect to both the $52 trillion U.S. housing market and the ongoing scholarly debates regarding agency costs and Collaborative Industries."

#########

Earlier:

Thursday, November 2, 2023

Jury Finds Realtors Conspired to Keep Commissions High

MEDIEVAL MATCHING MARKETS by Lars Boerner and Daniel Quint

 As I'll explain below, here's a long-awaited paper that fully qualifies for that description:

MEDIEVAL MATCHING MARKETS by Lars Boerner and Daniel Quint, International Economic Review, First published: 15 July 2022 https://doi.org/10.1111/iere.12600

Abstract: We study the regulation of brokerage in wholesale markets in premodern Central Western Europe. Examining 1,804 sets of rules from 82 cities, we find brokerage was primarily a centralized matchmaking mechanism. Brokerage was more common in towns with larger populations, better access to sea ports and trade routes, and greater political autonomy. Brokers' fee structures varied systematically: price-based fees were more common for highly heterogeneous goods, quantity-based fees for more homogeneous goods. We show theoretically that this was broadly consistent with total surplus maximization, and that brokerage was more valuable in markets with unequal numbers of buyers and sellers.

...

"We investigate how societies organized markets and whether their market policies were well designed to have a positive effect on welfare. We look at one important type of regulated allocation process, the organization of intermediation in the form of brokerage, primarily in wholesale markets. Regulated intermediation first appeared in European towns during the second half of the 13th century. Early regulations can particularly be found in Italy and the Lower Countries (van Houtte, 1936; Rezzara, 1903). However, a comprehensive quantitative study on the origin, spread and development of the brokerage institution is missing so far. Origins of brokerage have been linked to the urbanization process of the 13th century (van Houtte, 1936); whether it can be related to preceding medieval Arabic merchant institutions or Roman law is an open debate (van Houtte, 1936; Lieber, 1968).

"We study 231 cities in Central and Western Europe, roughly in the area of the Holy Roman Empire north of the Alps, during the period from 1200 to 1700. This area and period are particularly appealing for empirical investigation because local municipalities were typically economically and politically autonomous. Thus, each city could implement its own types of regulations and allocation mechanisms, leading to potentially rich variation in detail.

"We identify cities with (and without) brokerage regulations and find in cities with regulations a dominant brokerage design with specific combinations of rules. The dominant design was a sort of centralized matchmaking mechanism: a few licensed brokers specializing in a particular product were given the exclusive right to offer a service pairing mainly foreign merchants with local buyers, and their behavior was strictly regulated. Brokers were not allowed to do any business on their own behalf and were restricted in what information they could disclose. The brokerage service was open to everybody, to the rich and poor, and to foreign and local merchants. Brokers received a predefined fee based on the transactions they generated—most commonly either a fixed fee per unit traded or a fixed fraction of the sales price."

**********

I normally don't blog about papers twice, i.e. if I've blogged about the working paper I don't blog again about the published paper.  But this one has changed since I first blogged about it, and it implicitly tells us something about the current (but still medieval) publication system in Economics, since that was more than a decade ago. Here's the earlier (2011) blog.

Wednesday, February 16, 2011

Medieval Matching Markets

Pharmacy Benefit Managers--Alex Chan on NPR's Planet Money podcast

 Alex Chan is interviewed on the role of pharmacy benefit managers, their role in drug pricing, and some problems with the market design.

When supply chains break down, brokers make markets

During the Arab oil embargo of the U.S. in 1973, I remember hearing an oil broker discuss his day. He would cold call companies that used oil and ask if they had any to sell. Almost always he was told they were looking to buy oil, because their usual suppliers had gone dry. He'd write that down and go on to the next call.  Sometimes he'd find someone with oil to sell--maybe the general economic slowdown had reduced their consumption, but since they were normally buyers and not sellers they hadn't sold their surplus.  That kept the broker in business, he was able to help them sell their excess.

When well-established supply chains break down (e.g. as factories close in China and hospitals in NY are short of supplies, both because of the covid-19 pandemic), brokers are becoming important. Brokers work to piece together pieces of broken supply chains by connecting buyers and sellers. Even in times of shortages there can be sellers, with stock in their warehouses, who no longer have connection to buyers...

The NY Times has the story:

Marc Benioff’s $25 Million Blitz to Buy Protective Gear From China
A call from a university chancellor set in motion a private-sector effort to procure 50 million masks, gowns and swabs for American medical facilities.
By David Gelles

"The university’s usual suppliers in the United States were short on masks and face shields, and there was no sign that the State of California or the federal government was coming to the rescue. “The supply chain had really dried up,” Mr. Hawgood said.

"So Mr. Hawgood called Marc Benioff, the hyperconnected billionaire who is a founder and the chief executive of Salesforce.
...
"that phone call set off a frenzied effort by Mr. Benioff and his team that drew in major companies like FedEx, Walmart, Uber and Alibaba. In a matter of weeks, the team spent more than $25 million to procure more than 50 million pieces of protective equipment. Fifteen million units have already been delivered to hospitals, medical facilities and states, and more are on the way.

"The relative ease with which Salesforce acquired so much protective gear stands in sharp contrast to the often chaotic government efforts. While states have had to compete against one another for scarce supplies and the strategic national stockpile of protective gear is depleted, Mr. Benioff and his team simply called up their business partners in China and started writing checks.
...
"After Mr. Benioff got off the call with Mr. Hawgood on that Thursday, he called Daniel Zhang, chief executive of Alibaba, the enormous e-commerce marketplace. Last year, Salesforce and Alibaba announced a partnership meant to give Salesforce customers better access to the Chinese market, and teams from the two companies had been working closely.
...
"In San Francisco, Mr. Aytay and his team decided to buy only from companies that someone they knew well could personally vouch for. “Setting up a trust network was very important,” Mr. Aytay said.

"By March 22, the Salesforce team identified the first promising tip. The Jointown Pharmaceutical Group, a large Chinese company, had 500,000 surgical masks in a warehouse in Los Angeles."
*************

Of course there are perils in dealing with unusual suppliers, so the broker has to be reliable and have reliable connections.  After all, what could go wrong?

Buzzfeed news has the story:

After One Tweet To President Trump, This Man Got $69 Million From New York For Ventilators
The Silicon Valley engineer, who had no background in medical supplies but was recommended by the White House, never delivered the ventilators.

Competition by intermediaries can drive up prices:

A paper by Ben Edelman and Julian Wright considers how intermediaries can compete with each other for buyers by offering bigger refunds than do their competitors, resulting in higher prices and lower welfare...

Price Coherence and Adverse Intermediation by Benjamin Edelman and Julian Wright

"The organ detective:" article about anthropologist Nancy Scheper-Hughes

An interesting long article by Ethan Watters in the July/August issue of the Pacific Standard: The Organ Detective: A Career Spent Uncovering a Hidden Global Market in Human Flesh discusses Nancy Scheper-Hughes, her work, and her position on where anthropology should try to position itself between science and activism.

"Scheper-Hughes’ investigation of the organ trade would be a test case for a new kind of anthropology. This would be the study not of an isolated, exotic culture, but of a globalized, interconnected black market—one that crossed classes, cultures, and borders, linking impoverished paid donors to the highest-status individuals and institutions in the modern world. For Scheper-Hughes, the project presented an opportunity to show how an anthropologist could have a meaningful, real-time, and forceful impact on an ongoing injustice.
...
"Since the mid-1990s, Scheper-Hughes has published some 50 articles and book chapters about the organ trade, and she is currently in the process of synthesizing that material into a book, tentatively titled A World Cut in Two. Over the years, she has had an outsize impact on the intellectual trends in her field, and her study of the organ trade is likely to be her last major statement on the meaning and value of the discipline to which she has devoted her life. Whether this body of work represents a triumph of anthropological research or a cautionary tale about scholarly vigilantism is already a hotly disputed question among her colleagues.
...
"In a 1995 debate with the anthropologist Roy D’Andrade in the pages of Current Anthropology, Scheper-Hughes argued for what she called a “militant anthropology,” in which practitioners would become traitors to their class and nation by joining political battles arm in arm with their subjects. The job of the anthropologist wasn’t simply to document the quotidian but to strip away appearances and reveal the hidden forces and ideologies that leave people dominated and oppressed. To do this, she suggested throwing off the traditional guise of the academic—in “the spirit of the Brazilian ‘carnavalesque’”—and joining the powerless in their fight against bourgeois institutions like hospitals and universities.

“The new cadre of ‘barefoot anthropologists’ that I envision,” she wrote, “must become alarmists and shock troopers—the producers of politically complicated and morally demanding texts and images capable of sinking through the layers of acceptance, complicity, and bad faith that allow the suffering and the deaths to continue.”
...
"“With the moral model, the truth ain’t exactly the thing that everyone strives for,” D’Andrade, who is now retired and living in Northern California, told me. “What you strive for is a denunciation of a real evil.” I asked him who prevailed in his public debate with Scheper-Hughes. “I believed that after the kerfuffle that people would get back to asking, ‘How do you know something is true or not?’ But in the end, the moral model swept the country and cultural anthropology stopped being anything that a self-respecting social scientist would call a science. The hegemony of the Scheper-Hughes position became total.”
...
"In the Philippines, kidney sellers she interviewed often pulled up their shirts, displaying their nephrectomy scars with evident pride. They spoke of the surgery as a sacrifice made for their families, and members of their community sometimes compared their abdominal incisions to the lance wounds Christ received on the cross. In Moldova, as she reported in a 2003 paper published in the Journal of Human Rights, people who had sold their kidneys were considered so morally and physically compromised that they were treated as social pariahs. “That son of a bitch left me an invalid,” one Moldovan paid donor said of his surgeon. Young Brazilian men who had been flown to South Africa to sell their kidneys described to Scheper-Hughes how the experience had gained them a pass into the world of tourism and medical marvels. One told her that his main regret was not having spent more time in the hospital. “There were clean sheets, hot showers, lots of food,” he recalled. As he recovered, he went down to the hospital courtyard and bought himself his first cappuccino. “It was like ambrosia,” he said. “I really felt like a big tourist.” In the end, some attested that they would make the deal again, and some regretted the decision.
...
"One convicted broker, Gadalya “Gaddy” Tauber, gave her lengthy interviews while serving out his sentence in Henrique Dias military prison in Recife, Brazil. Tauber, she learned, had facilitated a trafficking scheme that sent poor Brazilians to a private medical center in South Africa to supply kidneys for Israeli transplant tourists. He employed a number of “kidney hunters,” some of whom were young men who had already donated their kidneys, to find new recruits. In the end, it wasn’t difficult. Once the first young men came back from surgery centers in South Africa showing off their thick rolls of cash, Tauber and his associates had more willing donors than they needed. They began to drop the price they offered to donors from $10,000 to $6,000 and then to $3,000, Scheper-Hughes reported in a 2007 profile of Tauber.
...
“Transplant surgeons vie only with the Vatican and its cardinals with respect to their assumption of privilege, irrefutability and of a kind of ‘divine election’ that seems to place them above (or outside) the mundane laws that govern ordinary mortals,” she wrote in one article. “Like child-molesting priests among Catholic clergy, these outlaw surgeons are protected by the corporate transplant professionals hierarchy.”
...
"Although she rejects Rothman’s contention that she is hostile to doctors, Scheper-Hughes has long argued that it is her job to investigate an insulated surgical profession prone to self-glorification. She felt obligated to challenge doctors who talked of “saving lives”—as if the benefits to organ recipients trumped all other concerns. She saw bioethicists who argued for a regulated market in kidneys as “handmaidens of free-market medicine.” And she likewise criticized tame, “clinically applied” medical anthropologists who work closely with doctors to provide the spoonful of cultural knowledge that helps the Western medicine go down.

Back in 1990, she argued that the job of a medical anthropologist was to question, even ridicule, Western medicine.
...
"In the medical community, despite her record of antagonization, many transplant surgeons give Scheper-Hughes credit for bringing widespread abuses to light, and for revealing the voices of donors and middlemen in the transplant trade. “She’s pointed out that underground illegal markets really do exist,” says Arthur Matas, the director of the Renal Transplant Program at the University of Minnesota. While most transplant surgeons like to think that their community would never participate in such a black market, Matas says, Scheper-Hughes has made it clear that they do—“sometimes unknowingly and sometimes knowingly.”



Here are some previous posts in which I've written about Scheper-Hughes and her work on black markets in organs.

Literary agents as matchmakers

Their secret, says Michael Bourne, is to try not to spend much time on work that they don't think they can sell...“A Right Fit”: Navigating the World of Literary Agents

"Mainstream publishing is a Rube Goldberg machine of perverse economic incentives, in which large numbers of mostly idiotic self-help guides, diet books, and airport thrillers subsidize an ever-shrinking number of mostly money-losing literary novels and books of poetry. But just because publishing operates on a crazy economic model doesn’t mean it doesn’t make sense. There is a market, however tiny, for good books, and there are a small number of smart, hard-working people who live for the thrill of finding a talented author. If you are one of those talented authors, then it is your job to stop whining and figure out how to make it easy for them to find you."

Search firms in university hiring could become illegal in Illinois

Search firms for hiring university administrators could become illegal for public universities in Illinois: Illinois Bill Would Ban Use of Search Firms in Hiring at Public Universities

"A bill pending before the State Senate would prohibit public universities from "contracting with outside search firms, executive search firms, or similar organizations." Supporters of the legislation say that paying consultants to find candidates is a poor use of taxpayer and tuition dollars, and that hiring is a responsibility that should fall to those on the university's payroll.
...
"Universities across the country have increasingly turned to outside consultants, at least for hiring at the presidential level. Search consultants were used to recruit nearly 60 percent of recently hired presidents, a jump from 49 percent four years ago, according to an American Council on Education survey released this year.
**************

Update, May 31: Illinois Legislators Approve Limits on Use of Search Firms in Public Universities' Hiring

"Illinois legislators have approved a bill that would restrict the use of search firms to fill vacancies at public universities, but the measure backs away from earlier proposals that would have banned the increasingly popular practice entirely.

"The amended bill, which passed the Illinois House of Representatives and the State Senate this week, would allow universities to contract with search firms to help fill presidential vacancies, but it would limit their use in other cases. Before employing outside consultants to aid in nonpresidential searches, a university and its board of trustees would have to "demonstrate a justifiable need for guidance from an individual or firm with specific expertise in the field of the hiring." The bill would require the state's public institutions to enact policies that define the criteria for when hiring a search firm is necessary.

"The bill, HB 5914, will next be sent to the governor, who is reviewing the legislation, his spokesperson said Wednesday.

"The University of Illinois objected to earlier versions of the bill that featured a complete ban on outside search consultants, arguing that such a prohibition would impede its ability to compete for well-qualified candidates. Over the past several months, the university has sought to persuade the legislation's sponsors to relax the language in the bill."

Sports agents and the NCAA

Joe Nocera in the NY Times talks about yet another way that professional and college hockey interact differently than do other sports: The Hockey Exemption. Professional agents, it appears, are transparently involved.

"By their mid-teens, good hockey players have the option of joining a Canadian junior league. Once they become eligible for the pro draft at age 19, they have to decide whether to sign with the team that drafts them or go to college. To help guide these decisions, agents often talk to the professional teams that draft their players; they also talk to college coaches."
*****************
In a previous post, I wrote about  Hockey: the NHL draft is different

Internet dating not working for you? Hire a wingman or wingwoman

I'm sure there's a Shakespeare comedy about this latest twist on the dating game...

On a Wingman and a Prayer: Singles Bow to Cupids-for-Hire

"As romantics grow weary of the digital dating game, so-called wingman and wingwoman services are taking them back in time. Such outfits, which popped up in cities like Boston and New York as long as eight years ago, are promoting the old-fashioned tête-à-tête. They're gaining traction at a time when Internet dating sites are attracting fewer visitors.

"Susan Baxter, founder of "Hire a Boston Wingwoman," says she launched her business specifically because her friends were fatigued by online dating. She sensed a good niche.

"You go to meet [the person] and realize their picture was taken 10 years ago and that they are not who you thought," says Ms. Baxter, 32 years old. Paired with a confident wingwoman, her customers "can see prospective partners right away, and know right then and there if there is chemistry."

"Ms. Baxter, whose fees start at $130, insists that clients who go out with a pro have better odds of success than those who troll with an untrained male buddy. Often, the friend "says stupid stuff, like 'my friend thinks you're hot,'" she says.

"The service's slogan: "We're better at hitting on women than you are."

Real estate agents as middlemen

A new NBER paper examines real estate agents in Boston:
The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston,
by Panle Jia Barwick and Parag A. Pathak

Abstract: This paper studies the real estate brokerage industry in Greater Boston, an industry with low entry barriers and substantial turnover. Using a comprehensive dataset of agents and transactions from 1998-2007, we find that entry does not increase sales probabilities or reduce the time it takes for properties to sell, decreases the market share of experienced agents, and leads to a reduction in average service quality. These empirical patterns motivate an econometric model of the dynamic optimizing behavior of agents that serves as the foundation for simulating counterfactual market structures. A one-half reduction in the commission rate leads to a 73% increase in the number of houses each agent sells and benefits consumers by about $2 billion. House price appreciation in the first half of the 2000s accounts for 24% of overall entry and a 31% decline in the number of houses sold by each agent. Low cost programs that provide information about past agent performance have the potential to increase overall productivity and generate significant social savings.

Middlemen and repugnance

Luke Coffman has shown how employing a middleman can reduce the apparent blameworthiness of an action ( Intermediation Reduces Punishment (And Reward) , forthcoming, American Economic Journal: Microeconomics, , November 2011)

But being a middleman is complicated. Just as adding money to some transactions can sometimes change them to something that is regarded as repugnant and perhaps illegal (e.g. selling a kidney versus donating one), so can adding a middleman.  And it matters how the middleman is compensated.

Inside Higher Ed reports on the controversy surrounding middlemen who act as marketers for colleges: Holding the Line on Agents

"The National Association for College Admission Counseling has long had a policy barring commission payments to anyone for recruiting or enrolling students. The policy is consistent with U.S. law with regard to domestic students -- a statute that was developed in part out of concerns over admissions practices at some for-profit institutions.

The U.S. law doesn't apply to the recruitment of foreign students -- and a growing number of colleges have employed agents, who are paid in part on commission, to recruit abroad. Advocates for the use of agents have been encouraging NACAC to consider differentiating between the recruitment of foreign and domestic students, and permitting commissions for recruiting the former. But NACAC appears headed in the opposite direction. The association's board has released a draft policy revision that clarifies the issue only by being more explicit that the ban on commissions applies whether the recruited students are in the U.S. or abroad.

...

"NACAC is not opposed to the use of agents or agencies to recruit international students," the draft states. "We believe, however, that the use of agents who are compensated in the form of bonus, commission or other incentive payment on the basis of the number of students recruited or enrolled creates an environment in which misrepresentation and conflicts of interests are unavoidable."

*********

The Chronicle of Higher Ed also covers the matter:
Use of Paid Agents to Recruit International Students Sparks Lively Debate at Forum

"The practice of using commissioned agents to bring in foreign students to American colleges and universities came under sharp criticism during an international-education conference organized by the U.S. State Department, with one panelist comparing it to contracting out the student-recruitment process to a car salesman.
...
"The practice of paying overseas agents for the students they recruit has become more contentious as it has grown more common among American colleges. Proponents say it can help attract students in an increasingly competitive global student market, and they note that other countries, like Australia and Britain, rely on foreign representatives to bring in students.
But a primary membership group for admissions officials, the National Association for College Admission Counseling, or NACAC, has released a proposed policy statement that would expressly forbid colleges from using commission-based agents to recruit domestically or internationally. (Institutions cannot pay commissions for domestic students if they receive federal financial-aid funds.)
...
"One person who was clear about where he stood was Mr. Nassirian. "It's a very simple proposition," Mr. Nassirian said. "It stinks to high heaven."
In his comments, Mr. Nassirian criticized the American International Recruiting Council, a group that has begun to set standards for and accredit overseas recruiters, calling its efforts "laughably inadequate."
"It's like attempting to regulate bribery overseas so it is done ethically," he said.
Officials for the recruiting group, which is known as AIRC, were not present at the event, and no supporters of paying overseas commissions were included on the panel. In an e-mail message, Mitch Leventhal, AIRC's founder, called Mr. Nassirian "long on bombast and short on facts."
"It is unconscionable to stand in the way of these developments, which are aimed at protecting students and which are being undertaken from within the mainstream of American higher education," said Mr. Leventhal, who is vice chancellor for global affairs at the State University of New York. "Rather than inventing facts, these critics would be well served to read the AIRC standards and suggest specific modifications, which will lead to a better outcome."
********

And here is the AIRC site, which includes a memo reply to NACAC:
"AIRC agrees with NACAC that “it is in the interests of institutions of higher education, as well as the public diplomacy of the U.S. itself,  to maintain high standards for the recruitment of students.” We also agree that there is potential  for misrepresentation, fraud,
and other unethical behavior in an “unregulated” international student recruitment environment.

"However, AIRC is convinced that the proposed ban on commission-­‐based international
recruitment would not be an effective way to achieve these goals."

Medieval Matching Markets

That's the title of a working paper by Lars Börner and Daniel Quint, studying brokerage rules developed by central and western European towns in the years from 1200 to the 1600: their map is below. Traveling merchants would either have the option or be required to deal with local brokers, who operated by a number of different rules (e.g. in some towns they could only act as brokers and could not engage in private deals on their own behalf). The paper analyzes the brokerage rules in a two-sided matching framework, in which considerations of stability are important to the brokers either to avoid having merchants do without brokers, or to avoid having them go to other brokers.

Here's the abstract:
"This paper studies the market microstructure of pre-industrial Europe. In particular we investigate the institution of the broker in markets and fairs, and develop a unique data set of approximately 1100 sets of brokerage rules in 42 merchant towns in Central and Western Europe from the late 13th to the end of the 17th century. We show that towns implemented brokerage as an efficient matchmaking institution in a two-sided market problem. Furthermore, towns differentiated seller-friendly from buyer-friendlier matching mechanisms. We show that the decision to implement matchmaking mechanisms, and whether these mechanisms would be buyer- or seller friendly, depends on the products in question and the stated policy goals of the town, as well as time and geographic variables."

Brokers for pirate ransom

Suppose your ship were hijacked by Somali pirates, and you wanted to ransom it and the crew. How would you go about it?  You would need a middleman, someone who could get the money to the right pirates, and maybe who played a repeated game with them, to help ensure that the release would go as planned. As it happens, you might become the client of a certain kind of British law firm, whose market is now threatened by the imposition of sanctions against those who deal with certain named Somali pirates. The problem is, it may be impossible to pay a ransom without doing business with the embargoed individuals. The Financial Times reports: Somali crackdown threatens City role on ransoms

"International plans for a legal crackdown on the funding of piracy could scupper a burgeoning City industry.
"The United Nations plans for sanctions on two suspected pirates would hit the often lucrative work of the law firms, insurers and private security companies in London that quietly arrange ransoms to free kidnapped ships and crews."
...
"The government has decided to block the UN plans amid worries they could force shipowners and their advisers to stop paying ransoms or else risk prosecution.


"London’s piracy negotiation business brings together an unusual cast of characters, from hard-bitten security operatives to dapper lawyers making telephone calls to hijacked ships from offices close to the banks of the Thames.


"NYA International, a kidnap response specialist based off Bishopsgate and now part of Aon, the US insurance broker, has advised on more than 20 piracy incidents during the past 18 months or so.


"The leading ship hijack case law firm in terms of numbers of clients is said to be Holman Fenwick Willan, which has offices north-west of the Tower of London.


"James Gosling, partner at HFW, said: “Nobody wants to pay ransoms. But when it’s the only option, what the hell else do you do?” "
...
"The concern about sanctions is that, while they do not explicitly outlaw the payment of ransoms, they make it impossible in practice because of the uncertainty about where money given to pirates will end up.

“The problem is the due diligence,” Mr Roberts said. “How can you possibly know if the money is going to that [sanctioned] person or not?”

"Maritime lawyers in London say they were encouraged by a High Court ruling this year that paying ransoms wasn’t contrary to British public policy, although they admit the argument over the subject is increasingly becoming political rather than legal.

"That is why the capital’s community of piracy-related businesses is appealing to the government to hold firm in stopping the UN proposal and the sanctions it would introduce.

"As one London-based insurer, who asked not to be named, put it: “We would be very concerned if shipowners were denied a means to free pirated ships.

“There are no navies prepared to go all guns blazing to rescue people – and it wouldn’t work, either.” "

The market for bulk commodity shipments

The transport of bulk commodities by sea is a business that depends on matching loads to ships. When times are good, ships may be fully booked, and costly, and when times are bad ships may be available and cheap.

"The Baltic Exchange is an association of ship owners, and has a long and colorful history. Because shipping prices are an indicator of the general economy, the Baltic Exchange Dry Index, which measures the cost of hiring a big ship, is a leading indicator of commodities trading in particular and of economic activity in general.

As recently adjusted, the components of the index are indices for different kinds of shipping, in order of cargo capacity: Capesize (too big to transit the Suez canal, so have to go around), Panamax (the maximum size ship that can go through the Panama canal), Supramax, and Handysize.

Testing companies as (nonprofit) gate keepers

In the U.S., the gate keepers to many kinds of opportunities are testing companies. Tests are the "standardised" part of college admissions. While the value of tests like the SAT are somewhat controversial, they give college admissions offices numbers that are easier to compare than, say, high school grades from different high schools.

Slate follows the money, and the nonprofit status of the main testing companies: Taking the $ATs
"Last year, the SAT cost $45 for the basic test, which 1.5 million U.S. students took. The College Board does not comment on how much revenue each test brings in, but once you factor in the nearly 222,000 students who received fee waivers from the College Board, you can roughly estimate that SAT revenue was at least $58,360,365. I say at least because many students take the test over and over again, trying to refine their scores to get into better colleges. That's not to mention the litany of extra fees the College Board charges if you get your scores by phone ($12.50), rush the results ($36.50), or ask for a refund ($7). The real revenue is likely to be millions more than $58,360,365, and that's before you factor in the foreigners who want a piece of an American education ($26 international processing fee; $23 more if you're taking it in India or Pakistan).
That's only the beginning. Many colleges also demand that students take SAT Subject Tests, which are more focused than the broad-ranging SAT. The majority of students who take Subject Tests, which are at least $29 each, sit for three or more. In all, 752,854 Subject Tests were taken, leading to at least $21.8 million in revenue but certainly far more because of the flexible pricing structure.
The PSAT, which serves little purpose besides being a warm-up act for the SAT? $13 per test. In 2006, 2.7 million students took the PSAT for an estimated $35.3 million in revenue, less whatever costs the College Board waived for low-income students.
Then there are the AP exams, which assess whether students have college-level mastery of a subject, usually after taking a corresponding honors course in high school. Having an AP course on your transcript is highly attractive for your college application, just as scoring well on an AP test is highly beneficial once you get to college. So for the elite students in the country, the AP test is a necessary evil, one that costs them $86. In 2008, more than 2.7 million AP tests were taken worldwide. That's more than $232 million of revenue.
In 2006—the most recent year for which the College Board's tax returns are available—the College Board brought in a total of $582.9 million of revenue. Meanwhile, it spent only $527.8 million. That leaves it with a $55.1 million surplus.
In most cases we'd call that $55.1 million a pretty good profit margin. But here's the thing: It's not profit; it's "excess." The College Board is a nonprofit, so by law that $55.1 million has to be rolled over to the next year's budget. In exchange, the College Board gets a host of tax breaks and the cultural benefit of seeming like a cuddly, crunchy organization meant to promote educational ideals. But it's not; it's just as money-hungry and market-share-driven as any other organization. It needs to be to survive an increasingly crowded marketplace. But at what cost?
Some history for context: The College Board was started back in 1900 to help streamline the college-application process. A bunch of colleges had a confab and realized it would be easier if there were a general entrance exam that would qualify you for all the schools at once. Thus, the SAT. These days, the College Board is still a member organization, and it costs a paltry $325 a year to be in the ranks. Those dues grant you a small voice in an unwieldy representative democracy. There are more than 5,000 members, and the real decisions are made by the employees and trustees of the board."
...
"Of course, the College Board is not alone in its drive for revenue. Its main rival, ACT Inc., is a nonprofit out of Iowa City, Iowa, that administers the ACT test, the SAT's main competition. It had a $36 million surplus in 2007, which it says it reinvests in its programs and services, just as the College Board says it does. ACT charges 31 cents each time a college pulls a student's home address from its database, which allows the college to send a promotional brochure to a student's home. Those kind of micropayments add up. (Asked via e-mail whether the College Board had a similar fee, the College Board's spokeswoman offered no response. Test watchdogs suggest that it does, though the fee is unknown. The Big Money was not granted any interviews with the College Board or ACT officials for this story.) The Educational Testing Service, the organization that the College Board uses to actually design, score, and transport the SATs (and to a lesser degree the AP tests), had a $94 million surplus and paid its president $931,605 in 2007.
Is all of this kosher? Nonprofits in this country are generally broken down into two categories: private foundations and public charities. Private foundations are organizations that give money out. Clearly, the College Board and its brethren do not fall under that lot. Most everybody else is classified as a public charity. It's a clumsy label for a whole host of outfits that we don't think of as charities—hospitals, colleges, advocacy groups. Usually, we associate contributions to these nonprofits as being tax-deductible; it's an incentive to give money to charity that makes the nonprofit status so tempting to companies with a social mission. But checks written for the SAT and all the other standardized tests aren't tax-deductible because a service is being offered in exchange for the money. Hence, it's a transaction. A transaction that, according to the tax code, isn't nonprofit in its nature. Yet it counts toward all that revenue for the College Board, which filled out a nonprofit tax return, reaping all the benefits that go along with that. (Again, this all applies to ACT as well.)
To keep its nonprofit status, an organization must pass an IRS review every five years, which means it needs to execute its charitable mission appropriately. The College Board's charitable mission was summed up by its president in 2006: "to connect students to access and opportunity, to prepare more and more students to be ready to go to college and succeed." The quote's logic is circular. In order "to go to college and succeed," you have to get into college. And to do that, you have to prepare for and take the SAT. Certainly, the College Board can help you do that. But if the College Board didn't exist, there would be no need for it to happen in the first place."

Giving anonymously, through an intermediary

I recently blogged about a service set up to enable people to give (relatively) small gifts anonymously, Giving anonymously, for a fee .

Larger gifts, e.g. to university endowments, are also often given anonymously. But "anonymous" is a relative term, and often someone at the gift-receiving institution knows who the donor is. (Here at Harvard, my HBS office is in a building called Baker Library, whose southern side now sports a new wing called Bloomberg. It was anonymous for a while; all we knew was that the donor wished his identity to remain unknown until he had completed his election for a second term as mayor of New York.)

Now a number of gifts to universities have been made behind a deeper than usual veil of anonymity: Mystery donors give over $45M to 9 universities.

"A mystery is unfolding in the world of college fundraising: During the past few weeks, at least nine universities have received gifts totaling more than $45 million, and the schools had to promise not to try to find out the giver's identity.
One school went so far as to check with the IRS and the Department of Homeland Security just to make sure a $1.5 million gift didn't come from illegal sources.
"In my last 28 years in fundraising ... this is the first time I've dealt with a gift that the institution didn't know who the donor is," said Phillip D. Adams, vice president for university advancement at Norfolk State University, which received $3.5 million.
The gifts ranged from $8 million at Purdue to $1.5 million donated to the University of North Carolina at Asheville. The University of Iowa received $7 million; the University of Southern Mississippi, the University of North Carolina at Greensboro and the University of Maryland University College got $6 million each; the University of Colorado at Colorado Springs was given $5.5 million; and Penn State-Harrisburg received $3 million.
It's not clear whether the gifts came from an individual, an organization or a group of people with similar interests. In every case, the donor or donors dealt with the universities through lawyers or other middlemen. Some of the money came in cashier's checks, while other schools received checks from a law firm or another representative.
All the schools had to agree not to investigate the identity of the giver. Some were required to make such a promise in writing."

Update on scalping

My old friend the sports economist Larry DeBrock writes to update my recent post on Scalping and intermediation:

"...the Cubs won a big lawsuit in 2003 after they set up a wholly separate firm “Premium Ticket Services” and transferred GREAT seats to them before opening tickets to the general public. They made some tremendous markups (reported to be 30 times face) on these seats.
Attached is the law review paper about this case.
Jasmin Yang, A Whole Different Ballgame: Ticket Scalping Legislation and Behavioral Economics?, 7 VAND. J. ENT. L. & PRAC. 111, 111 (2004)."

I can't resist adding that, long, long before Larry became Dean of the College of Business at the University of Illinois in Urbana Champaign (so long ago that it was still called the College of Commerce, and the Rand Journal was still the Bell Journal), he coauthored what I always hoped would become the definitive paper on strikes in major league baseball.

Scalping and intermediation

The resale of tickets for concerts and sporting events, at higher prices than those at which they were initially made available, is often regarded as "scalping," a repugnant transaction that is illegal in some states. (See e.g. Greg Mankiw's post about resales of Jay Leno tickets...)

But the lines are getting less clear, as artists and sporting venues try to make use of the secondary market themselves, to benefit from the higher prices enabled by discriminatory pricing:
Concert Tickets Get Set Aside, Marked Up by Artists, Managers .

"Less than a minute after tickets for last August's Neil Diamond concerts at New York's Madison Square Garden went on sale, more than 100 seats were available for hundreds of dollars more than their normal face value on premium-ticket site TicketExchange.com. The seller? Neil Diamond."

..."Secondary ticket sales are viewed by Ticketmaster, concert promoters and artists as one of the biggest -- yet thorniest -- sources for revenue gains. In 2006, Ticketmaster launched TicketExchange in response to pressure put on its profit margins by secondary-ticket sellers such as StubHub. But in doing so, it opened the company to criticism by ticket brokers, fans and politicians, who accuse the ticketing giant of profiteering and obfuscation.
Ticketmaster is moving to distance itself from some parts of the secondary ticketing market. It is in the process of hiring an investment bank to try to sell another resale service, TicketsNow, according to people familiar with the matter.
Virtually every major concert tour today involves some official tickets that are priced and sold as if they were offered for resale by fans or brokers, but that are set aside by the artists and promoters, according to a number of people involved in the sales."

One of the interesting things about this story is how Ticketmaster and the artists seek to put some distance between themselves and the secondary market. Luke Coffman (who you can try to hire next year), has a paper that seeks to understand this: Intermediation Reduces Punishment .

As part of his investigation into how people view economic transactions, he runs experiments that show that charging a high price through an intermediary may be seen as less blameworthy than charging a high price directly, even if going through an intermediary means that the ultimate price charged is higher than it would have been with a direct sale. And, he finds, this doesn't seem to result from confusion; apparently putting some distance between yourself and an act that may be regarded as blameworthy dilutes the blame, even in the eyes of observers who understand that you are doing it for that reason.

The "middleman" view of scalping gets some support from Trent Reznor of the band Nine Inch Nails (courtesy of Eric Crampton's blog Offsetting Behavior, for which HT to MR).

Luke will be talking about his work on intermediation, and related work on how people perceive the moral content of economic transactions, in our Experimental Economics class today.

Networks and high school athletes

While the NCAA regulates the communication between high school and college coaches, it has more trouble regulating third-party networkers, the NY Times reports: College Recruiting’s Thin Gray Line. It isn't entirely clear who is extracting information rents from whom, but one worries about the high school players.

"“Recruiting for college football is obviously changing,” Prince said in a telephone interview. “It’s become much more like the basketball model. When that happens, you then have people who are intermediaries ...”"

HT Muriel Niederle