Sunday, March 2, 2014

A lemon market for poachers

[My new post at the Recon Hub, which I'll repost in full here...]

Ashok Rao has a provocative suggestion for stopping the rampant poaching of elephant and rhino. Drawing on insights from George Akerlof’s famous paper, “A Market for Lemons“, he argues that all we need to do is create some uncertainty in the illegal ivory trade:
Policymakers and conservationists need to stop auctioning horns and burning stockpiles of ivory, they need to create this asymmetry [which causes markets to break down under Akerlof's model]. And it’s not hard. By virtue of being a black market, there isn’t a good organized body that can consistently verify the quality of ivory in general. Sure, it’s easy to access, but ultimately there’s a lot of supply chain uncertainty. 
There is a cheap way to exploit this. The government, or some general body that has access to tons of ivory, should douse (or credibly commit to dousing) the tusks with some sort of deadly poison, and sell the stuff across all markets. Granting some additional complexities, the black market could not differentiate between clean and lethal ivory, and buyers would refrain from buying all ivory in fear. The market would be paralyzed.
I really like Ashok's proposal… Not least of all, because it is virtually identical to an idea that Torben and I had whilst out for a few drinks one night! (This includes the invocation of Akerlof, by the way.) The big difference being that we didn't go so far as to suggest that the ivory should be poisoned: In our minds, flooding the market with “inferior”, but hard-to-detect fake product would do the trick.

To see why this might be the case, consider the economic choices of an individual poacher. Poaching is a risky activity and there is a decidedly non-negligible probability that you will be imprisoned, severely injured, or even killed as a result of your illegal actions. However, it still makes sense to take on these risks as long as the potential pay-off is high enough… And with rhino horn and ivory presently trading at record prices, that certainly happens to be the case. However, all that an intervention like the one proposed above needs to achieve, is to drive down the price of ivory to a level that would cause most rational agents to reconsider the risks of poaching. What level would this be exactly? That’s impossible for me to say, but I'm willing to bet that poachers are highly price sensitive.

A final comment before I close, inspired by another blog post that has also commented on Ashok's proposal. Jonathan Catal├ín correctly points out that one of the most valuable aspects of original “lemons” paper, is to force us to think carefully about why asymmetric markets don’t generally collapse into the degenerate equilibrium implied by Akerlof's theory. Perhaps the best answer to that is one hinted at by Akerlof himself: institutions like money-back guarantees, brand reputation, etc.. In light of this, Jonathan wonders whether the black-market wouldn't simply just adopt practices to weed out the counterfeit goods? My feeling, however, is that it is misleading to compare the ivory and rhino horn trade to other illegal markets in this respect. In the drug industry, for example, cartels are able to test the quality of a cocaine shipment simply by trying it themselves. Drugs have a very definite effect on us physiologically and so “quality control” (so to speak) is relatively easy to do. In comparison, we know that crushed rhino horn has no medical efficacy whatsoever… whether that is with respect to treating cancer or healing regular aches and pains. I therefore strongly suspect that it would be much harder for a buyer of powered rhino horn to verify whether their product is the real deal or not. The placebo effect will be as strong, or weak, regardless.

PS -- Legalisation of the ivory and horn trade is another economic approach to solving the poaching problem. Proponents of this view see it as creating opportunities for a sustainable market that both incentivises breeding and undercuts poachers. I am favourably predisposed towards this particular argument, at least in the case of rhino since they are easier to farm. However, I am not convinced that it will put an end to poaching, which will continue as long as the rents are there to be captured. There also remains the question of how demand will respond to a surge in supply, as well as issues related to a biological monoculture (i.e. rhinos will be bred solely on the basis of increasing their horn size). However, those remain issues another day.