The overpayers’ club

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.


24 Responses to “The overpayers’ club”

  1. Kid Dynamite writes:

    Is this kinda like the Anti-Groupon? The Bizarro-Groupon? And what does that say about Groupon’s value, if anything?

  2. MRP writes:

    I think that rather than dollar-valued member payment history, vendors should only have access to data on the members’ payment relative to other members. It should improve a member’s reputation to have paid only 1/2-price at a vendor where the average member pays 1/3-price. A member who consistently pays in the 45th-55th percentiles may be more welcome than one that ranges between the 10th & 90th.

  3. mittelwerk writes:

    the future looks a lot like feudalism + bandwidth.

    civil-law commodification of economic actors, abstracted as legal persons, in fact displaced the “equity arrangements” you speak of (civil law, being, btw, the only real innovation of roman antiquity). the autonomous economic sphere thus enabled also constitutes “freedom” in the modern sense particular to capitalism.

    overpayment would quickly be construed as “command, not counsel”

  4. mittelwerk writes:

    i meant to add: the only real innovation of roman antiquity, according to marx

  5. dirk writes:

    The sellers would benefit a lot more than merely the average 10% extra. They would receive significantly more information from their customers than presently. Normally when you lose a customer, you have no idea why. Were they dissatisfied or do they merely not consume much of this service? The overpayer’s club would leave sellers guessing less about whether the problem was the quality of service or not, and be able to adjust their practices more quickly. Even with the custom of tipping, the information is ambiguous. Was it the food, the service, or the cheapness of the customer?

  6. mittelwerk writes:

    what exactly is “ambiguous” about “hey, that was a great fucking meal!” to the maitre’d/chef/waitress? or the arcane, opaque symbolism of … repeat business?

  7. dirk writes:

    @mittelwerk, Nothing, but most customers don’t behave that way. Most customers come and go and give little direct information about their level of satisfaction. Of course, some do. But even repeat business can be a lagging indicator. How often do you hear people say: “We used to go there all the time, but then their quality fell off.” Yet, whereas they tell their friends this, they probably didn’t tell the business. Most customers, when they stop patronizing a business, simply quietly disappear. Perhaps you could argue that the type of people who join the overpayer’s club would be the same type of people who would otherwise have called the manager over and told them what they thought, but I suspect there wouldn’t be a one-to-one correspondence of such people.

  8. Mattia Landoni writes:

    Steve, this is awesome! I love your blog. Great insight.

  9. Mattia Landoni writes:

    …except that you shouldn’t really trust Yelp for food. That has nothing to do with equity or debt. :-P

  10. Prakash writes:

    Hi Steve,

    Are you aware of the concept of Open Capital promoted by Chris Cook? The last time I posted, it didn’t get past the moderator, maybe due to links. This time, I’m playing safe. Please google ‘open capital chris cook’. The first result and within that, the essay on sharing of risk and reward. Thoughts similar to those expressed in this post. Chris didn’t analyse it in the exact way you did, but he does present a structure, a LLP, which can implement the thoughts here. Not sure of its possibility in American law, though.

  11. […] The overpayers’ club Steve Waldman […]

  12. dotcommunist writes:

    to maybe sum it up:

    true cooperative business structures are the only way to fix the ills of highly advanced corporate structures defining the world and our relationships with services and products. nice work. vanguard. lets do this it then. promote incorporation as a “for profit” cooperative.

  13. dave writes:

    Without getting into too much detail, it just has the feel of “too complicated” to me. I think your underestimating 1) the complication of collection, 2) the immense social pressure such discretion would have.

    Imagine for instance I try a new restaurant. I order a new dish I’ve never had and don’t like it. Am I supposed to pay them 50% of the bill? If I want to go back there and try something else I’m now going to get dirty looks from everyone.

    I’ve met people from other countries where tipping is not common and they flip over having to tip in America, they just don’t know what to do. Even in America its generally acknowledged that tipping is a dumb practice but it carries on due to momentum.

    Isn’t it even worse for services rather then a restaurant. How do I evaluate my kids piano lesson? If I just pay what the bill is am I sending the message I find the persons work merely adequate.

  14. dave writes:

    To add briefly, people seem to be willing to pay a premium to not have to quantify everything. I went to an all inclusive resort a few months ago. The fact that the entire resort was included in one price and there were no extras or tipping was a huge selling point.

  15. StiffUpperLip writes:

    Doesn’t this have a separate, and perhaps even uglier (depending on your views) problem? We go from a world of low-trust, indifference, bottom-line orientation, and coldness to one that requires status games, carrying favor, and saving face? It may solve the problems you outline, but does it really sound like a superior option culturally? I’ll take cold and uncaring rather than fake and ugly any day.

  16. Indy writes:

    Three problems.

    1. There is no surer way to guarantee the Commodification of True Intimate Relationships into False Pseudo-Relationships than to systematize the process. The Commodifiers, as middle men, will be the true owners of the relationships, and so will game and also will be gamed. Enter Ratings Agencies. Exit, Stage Left.

    2. “Overpaying” can be relative. Sometimes “Adequately Paying”, or fulfilling one’s formal legal obligations, is “over” the expected value (diluted, as it is, with a certain number of delinquent accounts). What happens to the over and under payers in such a regime? They get tracked and scored. Then those credit scores present an arbitrage opportunity, the exploitation of which results in differential pricing which tends to neutralize the effect of overpaying. The payers, one diverse and distinct, are by the process, again, commoditized, and then sliced, diced, repackaged, synthesized, and where have we heard all this before?

    3. Not everyone wants a reputation. The flight from accountability, the temper of our time, cannot accomplish its ends without some slack of anonymity. Top notch producers and consumers, of course, want reputation, because they expect they’ll have good ones, but the mediocre will see the obvious risks of a life of haggard paranoia and resist the implementation of any system of recorded measurement, and the bottom will fight with bare-knuckles. Only the elites are confident enough to be bullish about themselves, the rest of anxious humanity mysteriously shies away from what a marked-to-market valuation of the their soul’s shares might reveal.

  17. Oliver writes:

    The overpayers’ club is a club I’d like to join.

    I wouldn’t.

    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.

    Monitoring and disciplining is a benefit? Sounds like hard work and schadenfreude to me. Under normal circumstances, my disciplining tools are my visits, or lack thereof, and my word-of-mouth marketing. My bargaining power is de facto limited under both contracts (otherwise it would have to be the underpayer’s club) and my goodwill can easily be expressed with a generous tip, that has the extra benefit of ending up where it’s supposed to.

    When quality is low, customers can express that in a way that bites THE WAITER.

    The problem imho isn’t rigid contracts, it’s the implied privilege (e.g. of a bailout) that comes with holding enough of them. If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy. The problem isn’t (only) the owing, it’s the millions.

  18. JKH writes:

    “Providers would have instant access to members’ average overpayment (dollar-weighted) … any other information they contrive to mine from customers’ overpayment history, when deciding whether to offer price flexibility”

    Algorithm challenges – average overpayment levels may be biased by the “true” average quality of individual payer experience, separate from the issue of “cheapness”; the decision to invest equity depends partly on vendor’s own evaluation of the risk worthiness of competing establishments and corresponding customer payment histories, etc. Keynes’ beauty contest is partly in play.

    “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.”

    What you are proposing deepens this idea from worker/server to institutional owner, and widens the applicable risk structure from the writing of calls (where the call has its own embedded equity exposure) to both the writing of calls and the buying of puts (where the combination constitutes the equity risk exposure), overlaying that expanded symmetric risk structure on risk free debt, thus creating composite equity. Risk is defined here as payment variability due to quality of goods and services, not counterparty credit.

    OK. Let’s implement.


  19. Lennyh4747 writes:

    I go into a restaurent for a typically good meal at a normal spot. It is not trendy. On this particular day there are three young pretty girls dining at the next table. I am a typical 55 year old married man. The food is good as usual. How much do I pay?

  20. Eric Titus writes:

    Interesting and thought-provoking, but I would definitely not join such a club! For a hypothetical example of why not, consider if I was to buy an HP computer for $600. I don’t have a point of reference for how much I should actually pay as a satisfied customer. And god forbid I got it on sale! Similarly, say you go to a Italian restaurant and find that you got a great meal for $20, better than a meal you had elsewhere for $25. Should you pay $30? I might ‘reward’ the restaurant with a big tip, and maybe by returning to the restaurant for another meal a few weeks later.

    While the notion of requiring a total of 10% above the stated prices is a good touch, I suspect that the motivation for joining this club is more a desire to underpay for bad experience, rather than to pay more for services that are currently a good value. And perhaps a larger problem with this idea is that businesses where people regularly underpay would drop out of the service. In the end, you would end up overpaying everywhere. And in that case, why not enjoy a nice glass of wine and desert with every meal!

  21. Epicurean Gourmet writes:

    issue debt to the restaurant owner, but equity to the server,


    Japanese Restaurants are installing more and more public monitors of cameras watching the cooks at the business of refraining from spitting into the food and other activities. Is information now more important than *slap down* by negative tip activity? Can’t you just use another restaurant when you see cook reach down to the floor to pick up the dropped drumstick and put back into platter?

    Information the important matter

  22. Eric Titus writes:

    Reading through some of the comments I find there are problems, but unfortunately overpaying is not a solution.
    One is that restaurant owners don’t have a good way of tracking their customers. This is certainly an issue, since if it hard to distinguish market randomness from longer-term trends that require action. But perhaps restaurants can just include a politely worded questionaire rather than overhauling their financial model? Surely there are better methods.

    There is also the problem of recouping costs for items that underperform, like socks that seem to develop holes all too quickly. I too have had this problem, although sometimes it is my fault for mistreating items rather than kevin cole’s. If I was a steady commenter on the internet I could punish those brands, but the socks are a sunk cost, and my time browsing other sites is worth more to me than the pleasure of complaining. Companies could offer you your money back for a shoddy product and charge slightly more, basically the same thing as an overpayer’s club, but the approach the market seems to dictate is to either make cheap, disposable items, or more expensive, reliable goods, with customer loyalty as the main check on quality.

    The last issue is that servers are currently on the hook for the whole of the customer experience. We have all had the dilemma whether the service is solid, the experience bad, and we don’t know how much to tip. And then there is also the reverse of delicious food and bad service. It think it does make sense to look for solutions that benefit both servers and restaurants…I just don’t know if this is the magic bullet.

  23. mittelwerk writes:

    indy above correctly points out that arbitrage lurks near any abstracted/commodofied relationship waiting to pounce — but i’d like to point out that in a major city like new york, where material-aesthetic consumption options (lunch, etc.) are not limited, it has already fully occurred.

    there is already a de facto “overpayer’s club” — known as the corporate expense account. midtown nyc is filled with establishments that, as any real ny’er knows, systematically overcharge (stage deli, anyone?), basically on hotelling logic, for genuine commodity calories, stuff you can get anywhere, in any city. they are pros at arbing the discrepancy between the crappy food and genuine non-commodity characteristics on sale: quick preparation and delivery, or location location location.

    on the other hand, the grade of “reputation” restaurant in nyc, in which the entire experience is putatively non-commodified (and therefore possesses elements of unrepeatability, i.e., “sacredness,” if you will), makes a joke of the whole overpayment scheme, since they basically charge a left ball and then some: whatever they want (per se, babbo, and of course masa). in MRS terms, they cost up to ten excellent meals elsewhere — surely an “irrational,” that is, aesthetic, valuation. anyone who steps in the door is a confirmed overpayer.

    but underpayment is also arbed, and, as noted above in another comment, is generally a much more satisfying and logical process. many restaurants in nyc, especially new ones run by newbie chefs, thrive precisely because it becomes objectively understood that they are systematic underchargers –a value for what you get. this is a genuine economic determination, by the way, not an aesthetic one. and the food could be simply ok, too — that is, commodity-quality — but offered at a better price than elsewhere.

  24. Japanese Restaurants are installing more and more public monitors of cameras watching the cooks at the business of refraining from spitting into the food and other activities.