The Wall Street Journal had a really interesting piece yesterday about the rise of "time banks" in Spain. The idea being that, in an economy as thoroughly broken as the Spanish economy, many unemployed attempt to use these intermediaries to facilitate a barter economy.
So, a bunch of people join together and offer to work on various odd jobs for each other, banking the time and using those collected hours to request services from others. Thus, Silvia Martin
...has relied on other time-bank members to give her lifts around town for her odd jobs and errands, as well as to help with house repairs. In return, she has cared for members' elderly relatives, organized children's parties and even hauled boxes for a member moving to a new house
Of course, the unemployment rate in Spain for 25-34 year-olds is an absurdly high 27%, while the rate for 16-24 year-olds is an even more absurdly, dangerously, high 53%. At least they aren't in a recession!
But it is interesting to observe that people are willing to enter these very small economies rather than keep attempting to make the regular economy work. At some level, they must be making the decision that trading without specialization (all hours are valued equally) and among a very small geographical group are costs worth paying in order to begin making some trades for labor. Amazing, really.
But, as you might expect, the idea of a time bank, where the unit of exchange is measured in hours, is just a very small step away from turning it into a real bank which uses its own currency.
Which is exactly what has happened in some cases.
One bank launched something called an "eco," a currency they just made up. Turns out, not only have dozens of local businesses decided to accept it as a basis for trade, so have two town governments!
There are some ways in which this is a very positive story: people working to solve problems the government is unwilling to solve. On the other hand, this represents groups of people choosing to work in a parallel economy with a non-convertible currency (and non-convertible even in, like, the next town over). That just gives you an idea of how desperate things are in Spain.
It is pretty typical for economists to view information as either “hard” or else “soft.” The difference being the ability of the person receiving the information to verify the claim made. Soft information is unverifiable and is believed only when the person receiving it figures his interests and the interests of the person sending it are aligned.
So, when my wife suggests we meet for lunch at our favorite place in Carytown, I just go ahead and believe her. Probably, she really does want to meet for lunch instead of wanting to design an elaborate ruse to waste time. Soft information can be useful in cases like this. This is cheap talk -- unverifiable and untrustworthy information, unless the interests of all the parties are sufficiently aligned.
Hard information is verifiable. Receivers of hard information are more likely to accept it as true even when the sender’s interests are not perfectly aligned with the receiver’s interests because false statements could be exposed (though, of course, the receiver might still verify statements whenever interests are very poorly aligned). UPS used to tell a story about a good employee who does not get a promotion and a great employee who does. Turns out, the difference was that when the good employee was asked a question, he returned with a verifiable answer to it; when the great employee was asked the same question, he returned with a boatload of verifiable information about it: shipment s left at time t, weighing w pounds and driven by driver d, etc., etc.
Of course, information is often neither hard nor soft, but somewhere in-between. Lots of information requires an effort by the person receiving it to turn it from soft information into hard information. A great example is a mathematical proof you might come across in a paper. Most of us, even if we are good at math, would have to make an effort to confirm that, in fact, for every epsilon there really is a delta such that…
Otherwise, and the way I usually do it, I just go ahead and believe the guy writing the proof. Here, information that could be verified is simply left as soft information and accepted based on the idea that the writer is probably not trying to get me to believe something about Proposition 26 that isn’t true.
But it is also generally true that soft information can be turned into verifiable statements when both the sender and the receiver make investments (time, effort, education, whatever). So, the “hardness” of information is variable and, more than that, a variable the listener can control. And that makes things more complicated.
I've got a problem with our client group...
Marketing analytics must include, finally, communication with other parts of the firm. As anybody who performs sophisticated analytics can attest, communication is not necessarily the easiest part of the process, not least because it involves a strategic interaction between the analysts (Senders) and the client groups (Receivers). This strategic interaction is filled with places where even the best analytics can wind up being discarded. So, we want to avoid that. How?
The communication effort should be built to manage the incentive alignment concerns of the recipients of the analysts and also take into account the fact that there is a moral hazard in this sort of communication.
One intuitive example of incentive alignment is when new analysts show up and begin looking at a process that has been active for a while. Newbies tend to find all sorts of places where the process seems sub-optimal to them and make recommendations on how to improve the process. It is very difficult for others to evaluate these recommendations because the incentive for new employees is to over-state the degree to which old processes need to be fixed. Finding problems puts them on the map, so they tend to find more than they should.
Well, we aren't newbies. So what's the real problem?
But the moral hazard is the real problem.
Side explanation: moral hazard
Moral hazard is the name economists use to talk about the problem that creeps up whenever costs are borne privately but benefits are shared: people tend to not want to invest in those costs. So, to use a typical example, car insurance is subject to moral hazard: we'd all benefit if I drove carefully, but since my personal cost of an accident is low, I might drive faster than I ought. Similar thing with communication: we both benefit if a good project gets implemented, but I might want to skimp on the cost of understanding the analysis that lets us understand the project.
It’s like this: getting knowledge from the head of the researcher into the head of the group that needs it requires investments from both sides. The analyst needs to make a good and effective presentation (which might very well involve multiple presentations, background conversations, multiple presentations given to multiple groups, etc.), but the group receiving the analysis needs to make investments, too. Understanding sophisticated analysis isn’t easy, especially if it uses unfamiliar techniques.
So, the payoff to the communication depends on the effort the other team puts in to understanding the analysis. And that creates room for moral hazard.
So, what do you do? Dewatripont and Tirole (2005) have a very interesting paper on this problem, which develops a model for this sort of communication. Like a lot of papers which deal with cooperative solutions, they wind up with a fairly large set of sub-cases, depending on the receiver’s assumptions about the degree to which his interests are aligned with the sender’s, the type of oversight (supervisory or executive) the receiver will ultimately have to exercise over the recommendation, the level of certainty the receiver has about the sender’s payoff associated with the project, etc.
Sounds complex
It gets dicey, for sure. The key insights are that a decrease in either party’s stake in the project will lessen the total communication effort. If there are communication “set-up costs” (new analytical techniques being introduced to the discussion, for example, that not everyone is familiar with), then we can see sudden and discontinuous breakdowns in communication. Senders of information should invest in positive cues about their credibility; that way, Receivers will be more likely to invest in the joint communication.
These cues come from sources you might expect: people who know the history of the Sender, people who have done some investigation of the analytical claims, etc. The goal of obtaining these cues is to convince the client to engage and evaluate the analysis. Once that happens, the analyst’s job is made much easier.
So, need other people to endorse the analysis? Where have I heard that before?
OK. Sounds obvious, I know. But it is a mistake I’ve made in the past and I’d bet it’s one others have made as well. Client can’t / won’t engage the analysis because he doesn’t have the skills to do so and doesn’t want to just rubber-stamp my project. So what do you do? If you are naïve, you ask him again, only using more flattery this time. Won’t work. What you need is some borrowed credibility – that’s the key. Without it, you simply can't expect to win -- communication is broken and can't be fixed.
