January 10, 2021
The most fun I had in graduate school was working with David S. Lucas and Ennio Piano on the phenomenon known as the “cobra effect.”
You’ve heard the story. In New Delhi, the British colonizers were more than a little spooked by the cobras that kept crossing their path. So, they created a bounty on snake tails. Enterprising natives—let’s call them “entrepreneurs”—began breeding snakes to redeem the tails for payments. The British, when they found tailless cobras slithering through the streets, disbanded the bounty program. Predictably, the natives responded by releasing their now-worthless financial assets into the wild, ballooning the snake population in the progress.
Some scholars consider the episode apocryphal.
What is not apocryphal is a very similar episode that played itself out in Hanoi, Vietnam around the same time. The so-called “cobra effect” describes scenarios where government intervention doesn’t just fail to achieve its stated ends. In fact, the intervention calls forth more of the very thing it’s purported to curtail.
For transaction cost “tails,” check out my paper in The Independent Review with David. We argue that the “cobra effect” is an under-explored illustration of the “dynamics of interventionism.” Specifically, it’s part of what Israel Kirzner would refer to as “superfluous discovery.” Here’s a snippet about the “cobra effect” that I published over at the Foundation for Economic Education:
“It was Mises who famously observed that a single government intervention typically spawns subsequent interventions to address the problems created by the first. Simply put, government intervention has unintended consequences.
But only a special few interventions decidedly encourage the very thing they were enacted to curtail. Curiously, these instances of government meddling often appear the most innocuous at first glance – the type of intervention even defenders of the market might not think are worth opposing. How could government cause serious damage merely by setting a price on a previously unpriced item?”
Ennio, David, and myself then explored what leads some bounty programs into fraud—and cobra effect territory—and what makes others successful. Here, we draw on the ideas of transaction cost economics. From our abstract:
“Throughout history, governments have engaged in exchange with private actors. Recent work has documented the prevalence of opportunism in a number of government bounty schemes, exploring how private entrepreneurs may rook the state and hence undermine the stated aims of these programs. We draw on transaction cost economics to provide a theory that explains the variation in the extent of opportunism in public-private exchange. The nature and extent of opportunism depends on the ability of the public authority to observe the production process of the good being claimed and the incentives to deny false claims. Where transaction costs limit observation, alternative (i.e., opportunistic) production processes will be prevalent. Where institutional features incentivize lax enforcement, opportunistic production processes will be prevalent. We illustrate our theory with two cases: navigational prizes in Great Britain and wolf bounties in North America. The cases provide evidence consistent with our theory.”
Check out both papers to see why I think economics is not only deadly serious, but heaps of fun too.