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Why aren't assurance contracts widely used?

by Daniel Kokotajlo1 min read1st Dec 201914 comments

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A priori, dominant assurance contracts seem like awesome tools for solving a fairly broad range of collective action problems. Why aren't they used much? Or is it just that they are a new idea and we should expect them to grow in prominence in the next few decades?



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It's certainly a new idea.

I think the reasons it might not work would also vary across potential problems they are trying to solve. What are the incentives that have led to the current state? Do people *actually* want to solve the problem?

You could well ask why they weren't used more in the past, but today they are becoming more widely used. Kickstarter is pretty popular, and they do assurance contracts. In my neighborhood, donations for a synagogue are being gathered on an assurance contract.

A couple thoughts:

  • The assurance contract's strength is also it's greatest weakness. Because its only valuable based on a majority of other people's actions, the most likely outcome is that you spent time (and possibly, the opportunity cost of escrowed money) on something that doesn't work out. The more contracts there are competing for time and money, the more significant this problem.

  • The second biggest issue with dominance assurance contracts is people needing to know about the contract, and spend time understanding it. This means there's a significant marketing cost to successful dominant assurance contracts. I would wager that if you mapped out spend vs. success on real life dominant assurance contracts like petitions and indiegogo campaigns (and scaled by the amount of money/signatures needed) you'd basically see a linear relationship between spend and success.

I think these two points together make dominant assurance contracts less attractive for many use cases than a naive analysis would suggest.

1Daniel Kokotajlo1yThe first point you make doesn't apply to dominant assurance contracts, which pay signers in the case where not enough people sign. I don't know of any real-world instance of dominant assurance contracts being used, but boy do they seem like they would be super effective. Imagine during the 2016 election: "Sign this petition if you want Michelle Obama to be president! If at least 100million people sign, you promise to vote for her. Otherwise, you'll get a $1 gift card to Target." Note that even in the unlikely event that this gets 99 million signatures, it would cost the organizer an order of magnitude less than Clinton spent on her campaign. More likely it would either get ~5 million signatures (because Michelle just isn't as popular as the organizer thought) or >100million. Petitions and indiegogo campaigns aren't dominant assurance contracts as far as I know. I agree that there is a cost to get people to understand them, but that's true for all sorts of complicated financial instruments like mortgages which we have no problem with.
3crl8261y"Sign this petition if you want Michelle Obama to be president! If at least 100million people sign, you promise to vote for her. Otherwise, you'll get a $1 gift card to Target." How would that promise be enforced? If me and my friends didn't want Michelle Obama to be President, wouldn't it be smart of us to all sign up and take money from an Obama supporter and then vote for who we really want?
1Daniel Kokotajlo1yOh right, I forgot, the $1 incentive gives people an ulterior motive for signing. :/ OK, so this is part of the answer to my original question--I had not noticed that fact and thus overestimated their usefulness.
2mr-hire1yI think you misunderstood my second point. Although there is a cost to complexity for ever dominant assurant contract, I was talking about the cost for each individual contract to get people to know about it. Re point #1, isn't this just moving the cost of failure from the individual to the person sponsoring the contract? It feels like a similar issue. Edit: Actually, it seems like game theoretically point #1 does seem a bit different with this setup. I'll have to think about it some more.
1Daniel Kokotajlo1yBut that doesn't seem like a big cost to me. It seems that other methods of solving coordination problems have similarly high or even higher costs--e.g. campaign to raise awareness to get people to vote for legislation to solve the problem... Think of how many petitions there are on Change.org and how many signatures they regularly get. Now imagine that you got paid $1 on average for each one that you signed. People would be making shittons of money just by logging into change.org and browsing through proposals. Until, that is, a large portion of the population starts regularly doing this... then the money flow shrinks but change starts happening! Yes it's moving the cost of failure to the person sponsoring the contract, but I think for many of these problems there should be people with enough money and altruism willing to take the risk. E.g. political campaigns regularly spend comparable sums. And like you perhaps hint at with the game theory point, it's different when the risk is all on one person--because it means we can be much more confident that the contract will trigger, conditional on someone taking the risk to fund it, and thus the risk is actually much smaller.

I'd argue that there are actually very few problems that are solved by these contracts, and not solved by more traditional mechanisms like taxes, clubs/churches, private investors, etc.

Can you name a few?

2Daniel Kokotajlo1yVoting for third-party candidates. Organizing marches and rallies. Things like the Free State Project (why aren't lots of other subcultures and political factions doing that?) Sweet parties at my house. Now that I think more about it, clubs/churches do this sort of thing all the time informally, e.g. survey the crowd and ask how many people would come to the event if it were held, and then hold the event iff at least x people say they would come, with social disapproval being the punishment for people who say they would come and then don't. And of course, the sort of things Kickstarter funds. So I guess that's part of my answer right there.
2Dagon1ySorry, I wasn't looking for things that an assurance contract could be used for, I was looking for things which are significantly improved by them (unsolvable without). I don't think assurance contracts make any of those things particularly more common/feasible than without such contracts. The original question was "why aren't they widely used", and my answer is "because they're not that useful on the relevant margins". [note: I don't believe they're useless, just that I don't think they're important enough to be confused that you don't see them all that much. I do believe that the IDEA of assurance contracts has contributed a lot to getting crowdfunding platforms going, but MOST of their projects are successful due to a functioning payments platform, more than the assurance contract portion of the service.]
1Daniel Kokotajlo1yI think voting for third-party candidates would be significantly improved by assurance contracts. Ditto for marches & rallies, and things like the Free State Project. (Imagine how much of a fail the FSP would have been if they used a more traditional method.) And I think maybe also kickstarter stuff? IDK, maybe this disagreement comes down to a disagreement about the meaning of "significantly."

Perhaps one way of looking at this is:

1) Assurance contracts have been used in the past, just in a non-obvious way. The type of collective actions problems being solved traditionally have been via government or clubs and other, non-collective action/public good type settings by things like escrow type solutions.

2) Until the internet and this form of mass communication/connect emerged the "problem" was not the assurance of commitment to contribute but the problem of cost in coordinating any such effort. The "fixed" costs of just proposing a solution and gathering a bunch of people to take action dominated and most of the big issues were being addressed by existing institutions.

I think the problem (at least relative to assurance contracts, which as other repliers have noted, seem to doing okay with kickstarter and other pledging sites), is a mismatch of incentives.

The primary impetus to propose and fund a new dominant assurance contract lies with the entrepreneur, but given a choice between an assurance contract (where if the pledge fails to reach its total, everyone just gets their money back, and the entrepreneur gets nothing), and a dominance assurance contract (where if the pledge fails to reach its total, everyone gets their money back, plus a share of the entrepreneur's original stake), any entrepreneur is going to prefer the first. So it's hard to move the system from assurance contracts to dominant ones.

This might change if there's evidence that the monetary payout encourages people to fully fund more dominance assurance contracts, but that would probably rely on a non-negligible additional pay-out -- and once again, individual entrepreneurs don't have an incentive to provide big payouts just to prove out the dominant assurance theory.