The overpayers’ club is a club I’d like to join. Somebody, please, help me pay too much. I want to overpay, but I insist on overpaying well.
Here is how the overpayers’ club would work. I’d enter a restaurant, and present my club card. The hostess would swipe the card (or perform whatever the newtech equivalent of a card-swipe is), and then either agree or apologetically refuse to accept my custom as an overpayer. If I am an overpayer, then my meal is on pay what you wish terms. At the end of the meal, an ordinary check would be tabulated and presented. But my payment of that check would be optional, and the amount I pay entirely at my discretion. After the meal, both the amount charged and the amount paid would attach to my permanent record with the club.
Service providers of many different kinds, not just restaurants, could participate in the program. The club would promote a norm, voluntary and nonbinding, that overpayers pay on average at least 10% more than amount billed at pre-agreed or ordinary prices. Providers would have instant access to members’ average overpayment (dollar-weighted), dispersion of overpayments, and any other information they contrive to mine from customers’ overpayment history, when deciding whether to offer price flexibility. The benefit for service providers in participating in the overpayers’ club is obvious. After refusing known cheapskates, they would expect to earn a substantial premium from overpayers. In exchange for that, they risk uncertainty and volatility of cash flows, which they can somewhat mitigate by delivering reliable quality.
Customers benefit from the ability to monitor and discipline relative quality among service providers, from increased agency and bargaining power within the context of isolated transactions, and, when quality is high, from the pleasure and mutual goodwill that comes from overpaying. When quality is low, customers can express that in a way that bites. At a restaurant, if I am unhappy with the quality of food or service, I can pay only half the check. Note that I cannot actually avoid the cost of my meal without putting my reputation in jeopardy. I’ll have to make up for stiffing the bad restaurant by overpaying other establishments unusually much in order to maintain my average overpayment. But I have the power to redirect funds from bad to good establishments without putting my overpayment record in jeopardy.
Besides restaurants, the overpayment club would obviously extend to businesses like hotels and salons. It could be useful for meat and produce purchases at grocery stores (whose bill would be payable after, say, a week, during which the food’s quality could be experienced). More ambitiously, a wide variety of professional services — consulting, programming, even doctoring, lawyering, and teaching — might benefit from the combination of discretionary payments disciplined by transparent and valuable customer reputations.
That’s the basic idea. There are lots of extensions and details to consider. Should merchants’ overpayment experience be accessible by club members or the general public? (Overprice transparency!) Should there be a mechanism by which members can augment past overpayments after some time has passed, both to allow a considered evaluation and in order to ensure that members who express dissatisfaction aren’t shut-out of opportunities to make up for the underpayment? Perhaps there should be a lottery that occasionally denies requests for price flexibility even by the very generous, in order to reduce the social stakes associated with refusals. How should tips and gratuities be dealt with? These are important details, but they are details.
In financial terms, this proposal can be described very simply. I want to give consumers the option to issue equity rather than debt in exchange for goods and services. You and the SEC may not have noticed, but when you sit down at a restaurant, order, and are served a meal, you issue debt. The restaurant extracts an unwritten but enforceable obligation that you pay a fixed sum of money. In exchange for that obligation, you receive an asset of uncertain consumption value. Canonically, the result of financing an asset with debt is to concentrate valuation uncertainty — risk — on the asset’s purchaser. Equity finance, on the other hand, diffuses risk, in exchange for sharing some of the upside if things works out.
Equity finance by vendors is particularly appropriate when the seller has better information than the buyer about the quality of the asset being sold. Vendors selling opaque but high quality assets can predict good realizations, and so are happy to take an equity position. Purchasers interpret sellers’ willingness to bear risk as a credible signal of quality that justifies extra cost. I think that we underutilize equity arrangements at every level of our society. We have made an error, from which we need to backtrack, that can be summed up by the word “commodification”. In the name of a false efficiency, we have struggled to cram everything from corn to cars to financial and legal relationships into the mold of widgets that can be competitively produced, objectively characterized, and then priced in fixed numeraire at arms-length by open markets. If only this could work, if things like financial services really were goods just like soda pop, the uncontroversial parts of microeconomics would vouchsafe easy, efficient commerce and we’d live happily ever after. But it can’t work. Pretending is killing us.
Commodification is a reasonable framework for managing trade in corn and manufactured goods, but is an inappropriate for any thing or practice whose quality is revealed over time. Commodities are appropriately priced in money and financed by debt. Goods and services that are not commodities require more complex forms of exchange than what’s imagined by an introductory economics textbook. What we must “buy and sell”, most of what matters, is relationships. Managing relationships is mysterious, a difficult problem. But we know more than nothing. Just as commodities are naturally exchanged for debt and money, relationship finance naturally takes the form of equity arrangements, in which cash flows are contingent upon variable outcomes. The trouble with equity is that, in most cases, the space of potential outcomes is too complex for the amount and timing of cash flows to be firmly contracted ex ante. Choices must be made, costs and benefits must be allocated, after events have unfolded. Ex post allocation implies discretion and requires trust. Trust outside of local social networks depends upon reputation. As economies have grown, we’ve gravitated to the commodity exchange model, because it is easy to scale with low information and transaction costs. We do not yet know how to reconcile large-scale open commerce with trade based on relationships, reputation, and equity. But in an IT-rich world, we should be able to make progress.
Equity arrangements, when they are successful, have positive social externalities. Fixed-price commodity exchange and ex ante contracting discourage both trust and what most of us would recognize as virtue. If a person receives poor value from a commodity purchase, the question to ask is whether she shopped well. Did she research the product or service she was buying? Did she look elsewhere for better pricing? Caveat emptor becomes a moral duty. Any hint that a transactor has not fulfilled her obligation to be energetically cynical disqualifies her from any claim to our sympathy. Sellers in a commodity world have no obligation but to maximize their advantage within bounds prescribed by law and formal contracts. After all, if buyers are informed, competitive shoppers who assume no beneficence on the part of counterparties, then anything that might go wrong after the sale must already have been priced into the contract.
Equity arrangements flip this logic 180 degrees. Equity relationships are based primarily on trust. Caveat emptor still has a role to play, in that extensions of trust should be merited. Not everyone is trustworthy or competent, so equity providers must be discriminating. But once the relationship is formed, an equity issuer who abuses her discretion and metes out an unfair distribution of risk and benefit, who seeks to maximize her own position to the disadvantage of collaborators, is justly condemned. In an equity world, well-placed trust, fair dealing, reputation, and character are rewarded, while in a debt/commodity world, shrewdness and informational advantage win the day. Designing and understanding our economic interactions more on equity rather than commodity terms would help to diminish some of what is parasitic about liberalism (ht Chris Mealy).
Both modes of commerce, debt/commodity and equity/collaboration, have their place. It’s nice that we can buy toothpaste and cereal without forming a relationship with the convenience store or much worrying about its reputation. Goods that can be standardized, that are easily understood and perform reliably, ought to trade as commodities. But most goods and services fall somewhere between toothpaste and astrology on the information spectrum. Real people in real economies have already invented hybrid schemes that mix the debt/commodity and equity/collaboration styles. Often when we buy complicated and expensive products, we trade them like commodities, but they come bundled with something called a “warranty” that shifts some of the uncertainty surrounding performance back to the seller. Most of us rely very little on the contractual fine print in these warranties, but depend instead on the reputation of the manufacturer or the retailer. We trust that these businesses will deal fairly with us ex post, even if we lack any formal assurance that they will. Without this kind of risk-sharing, a lot of markets would be severely handicapped. In restaurants, the American custom is to issue debt to the restaurant owner, but equity to the server, who is paid almost entirely from discretionary tips. This makes some sense, since we can gather information about restaurants from reputation and experience, but with each visit we patronize a server whom we do not know or choose. Still, even after wasting hours on Yelp, restaurant outcomes are highly variable. The arrangement is a rough on servers, who are at the mercy of generous clients and cheapskates alike, and who bear most of the consequences of errors made in the kitchen. The lack of any means to translate virtue on the part of clients into reputation is unfortunate.
Just as we’d be collectively poorer if no one had made workable the idea of a product warranty, we are poorer than we might be because we’ve not yet invented off-the-shelf tools to manage the information- and risk-sharing appropriate to variable-outcome services. These services resist commodification, but perhaps the infrastructure we use to manage them can be made more standard. The overpayers’ club, and its mirror image, equity finance of business by consumers and other stakeholders, amount to experiments in combining the risk-sharing of a relationship economy with the low costs, openness, and scale of a transactional economy. They are imperfect experiments, but they could be tried. Like always, we’ll stumble into the future. We might as well get started.