Ashok Rao on Elephants

Ashok Rao discusses the economics of poaching. He laments that anti-poaching laws are generally not very effective, and that enforcing  these laws is too costly, for too little bang. He has a creative market solution, applying one of the arguments George Akerlof makes in “The Market for Lemons.” Essentially, Rao calls for governments to supply “bad” ivory, and other poaching products, to create uncertainty about the market’s output’s average quality. Unfortunately, this proposal probably wouldn’t work, and for reasons hinted at in the very same Akerlof piece.

What’s Rao’s rationale? For those who haven’t read “The Market for Lemons,” I summarize it and its implications, here. But, in a nutshell, Akerlof assumes that some markets can be characterized by an informational asymmetry, where buyers and sellers hold different information on the average quality of output — sellers know the quality of what they’re selling, but buyers don’t. The used car market is his example of choice. Those supplying low quality products will try to pass them off as high quality; buyers, being rational, figure this out and, now being uncertain about the actual quality, ask sellers to lower their prices (a risk premium). Sellers of good quality output, at some margin, will be unwilling to sell their goods at these lower prices, lowering the average quality of output further. This can continue until the market is extinguished. Sounds like the perfect strategy, if you want to eliminate black markets in poaching!

Not so fast! The used car market is one beset by informational asymmetry — even despite increases in consumer knowledge —, yet it has survived. How? Akerlof gives us some hints, but the general answer is institutions. Instead of lowering the price, the seller might instead offer a guarantee, money back or otherwise. Alternatively, brand names are a way to allow consumers to differentiate between different sellers, where some are more reputable than others. The options are bound by the limits to human creativity. There may be institutions that are more proper of black markets, such as exclusive auctions, that deal only with certain sellers (of high repute).

What makes government such a poor regulator of market activity is that it’s hard for an uncompetitive bureaucracy to keep up with market innovation. Markets outsmart governments. We’ve seen it throughout history in the banking sector. We’ve seen it in illicit drug markets. We saw it in alcohol markets, during the Prohibition era. We see it with the internet. My guess is that we’d see it in illicit poaching markets, too. They would develop rules, institutions, that protect consumers and high quality sellers. Or, in any case, they would protect sellers’ profits.

Poaching is a difficult nut to crack. I’m not sure there is a satisfactory market solution. The solution most frequently suggested is privatization; maybe we could breed elephants and other exotic animals in farms, and butcher them. While acceptable to the apathetic — not everyone is an animal-lover —, it’s probably not acceptable to those who rather allow some animals to live without being turned into commodities (including Robert Nozick?). But, the government solution is even less appealing. In well-off countries, where government accrues relatively large tax revenues, enforcing anti-poaching laws can probably drive poaching down to near-zero. But, enforcement is very costly, especially effective enforcement, and the cost — the opportunity cost — may just be too high to sacrifice.

Update: To guard against the reservation that maybe black markets aren’t able to develop the necessary institutions, the empirical evidence suggests otherwise. Informational asymmetries beset various black markets: drugs, luxury items (including poaching product), firearms, et cetera. These markets have already developed ways of coping with information asymmetries on average quality — because this “market failure” is already endemic to the black market..

4 thoughts on “Ashok Rao on Elephants

  1. Ashok Rao

    I think we agree on the positive, not normative.

    The reasons you provided for the used car market’s continued existence is precisely why something like fake ivory wouldn’t work – a contract can be formed (and, in efficient markets, will be formed) that allows for some sort of money back or insurance policy, thereby allowing the market to live. What’s the insurance on life?

    We also agree about the government being, broadly, a poor regulator of micro market activity. But drugs are different, psychologically and in the way the government deals with it. We prefer jail and supply (rather than demand) side enforcement, which is far more expensive and less effective.

    Of course the kind of enforcement many people want is too expensive. But what I’m suggesting would be cheap, at least relative to the programs we have today.

    The ivory trade is not blessed with institutions. And that’s exploitable!

    Reply
    1. JCatalan

      I think the disagreement is over the positive aspect. If your solution worked, I don’t think it would be too costly. I just think that it wouldn’t work, because black markets would innovate to cope with the problem of quality uncertainty. Two big reasons come to mind immediately,

      (1) I think you would be surprised by what kind of quality control there already is in black markets, especially in black markets that deal with luxury items (think of the quality control in black markets in original artwork).

      (2) The institutions might not be there, because so far they don’t need to be there. But, if the situation changes, because, say, a new government policy meant to create quality uncertainty, they could arise. In fact, they probably would arise, just like they’ve arisen in other black markets (not just for luxury items, but even for relatively inexpensive goods, such as drugs).

      Edit: And, just to come back to Akerlof, I think the strength of his article is not showing why markets can collapse because of asymetrical information, but how markets cope (avoid collapse) with asymmetrical information.

      Reply
  2. Grant McDermott

    Good post, Jonathan. I agree completely that one of the biggest lessons from Akerlof’s paper is to focus our minds on the mechanisms (institutions) that enable markets to avoid the degenerate equilibrium implied by his theory.

    That said, I still like the logic of Ashok’s proposal (and the invocation of Akerlof) a lot… not least of all because a colleague and I hit upon a virtually identical idea about a year ago. We may been out drinking at the time, but I should say that our version didn’t go so far as to suggest that the ivory should be poisoned. Flooding the market with “inferior”, but hard-to-detect fake product should do it!

    That is, poaching is a dangerous activity, but continues to make sense for individual poachers as long as the price of horn or tusk is high enough to justify taking on those risks (which it currently is). All the intervention really needs to achieve is to create enough uncertainty in the market, so that the price drops below a level most rational agents would consider worth it.

    The two further comments that I want to make on your post are:

    1) Placebo effects aside, we know that powered rhino and elephant horn have no proven medical efficacy. It is therefore misleading to compare the quality control measures typically utilised in other black-market trades. For example, drug cartels are able to verify the quality of a cocaine delivery simply by testing the product themselves. It has a demonstrable effect on humans, which rhino horn (or elephant tusk) distinctly lacks. I strongly suspect that “quality control”, so to speak, will thus be much harder to enforce in the case of poaching.

    2) In well-off countries, where government accrues relatively large tax revenues, enforcing anti-poaching laws can probably drive poaching down to near-zero. But, enforcement is very costly, especially effective enforcement, and the cost — the opportunity cost — may just be too high to sacrifice. I may be misunderstanding you here, but the problem is even worse than that, exactly because the poaching industry — in terms of both supply and demand — is concentrated in poorer regions that lack credible enforcement alternatives.

    Reply
    1. JCatalan

      I guess my disagreement with Rao and you is empirical. I’m not so optimistic about the inability of poaching markets to develop ways of protecting themselves from that kind of intervention. And, I’m not sure why something would need a medical benefit for there to be institutions that protect against informational asymmetries. You’re the expert in poaching markets, I’m not, so maybe I’m missing something — but, these types of markets seem especially susceptible to fakes. Much like the illegal fine art market. And, if the government were to become involved (in the way you and Rao want it to), then the market would be especially susceptible to fakes, and we’d see institutions arise.

      Reply

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