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Markets in everything
Rather than a CDS, imagine a derivative security on the prospect of an endangered species:
Under their plan, the government would determine the cost of protecting a species if it becomes endangered. That money would be set aside to fund contracts with payouts pegged to species health. The contracts would be sold to landowners and developers whose actions directly affect the animals, though the contracts could be freely re-sold.
Should animal numbers fall beneath a predetermined threshold, contracts would be voided, and money devoted to anticipated recovery programs. If the species thrives, investors would be rewarded, with profits growing in direct proportion to species health.
"If there's a 99 percent chance that a species is going to survive," said Mandel, "you could trade that like a high-ranking bond. You know it's going to pay out."
I thank Adam Winski for the pointer.
Posted by Tyler Cowen on February 26, 2009 at 10:44 AM in Economics | Permalink
Comments
The same derivative security wizards that protected our houses, our insurance companies and our banks so well should do great applying their skills to ecology.
Advice to gorillas: Be Afraid. Be Very Afraid.
Posted by: zbicyclist at Feb 26, 2009 10:53:35 AM
Presumably one can also short these securities and then profit by poaching/massacring the animals?
Posted by: LZ at Feb 26, 2009 11:01:53 AM
and the contract on humans is analogous to the US Government CDS?
Posted by: MY at Feb 26, 2009 11:16:13 AM
Yeah, sounds like it would have the same problem as carbon trading. It's not really a market in X, it's a market in estimates of X, which means the mighty power of markets is harnessed chiefly to create the most misleading estimates.
Posted by: TheophileEscargot at Feb 26, 2009 11:28:26 AM
(See also the risk analyses coming out of derivatives markets recently... an estimate of risk is not risk).
Posted by: TheophileEscargot at Feb 26, 2009 11:32:03 AM
Ha-ha. Right in the top 10 delusional ideas of the year. Imagine how screwed up the food chain will become if humans will start competing on behalf of animals! I can picture some weird-colored frog monopolizing a rain forest because its species are managed by a bank that is too big to fail.
Posted by: deriuqer at Feb 26, 2009 11:33:06 AM
i prefer evolution futures myself.
Posted by: babar at Feb 26, 2009 11:34:54 AM
better make sure you get a good rating agency to count the animals!
Posted by: diesel mcfadden at Feb 26, 2009 11:43:51 AM
Cool idea, but wouldn't there still be a public goods/free rider problem? I own 1 "share" of the total animals in the woods, but my actions only minimally effect that total.
Private Marginal Cost != Social Marginal Cost.
Also, LZ's point about the shorting & poaching strategy is both intelligent and hilarious.
Posted by: brian at Feb 26, 2009 1:08:03 PM
I don't get it. What is this market supposed to achieve and by what mechanism?
The governement is supposed to determine the cost for conservation efforts upfront and would presumably also undertake these efforts if necessary. So no contribution of the market on cost estimation, oversight or implementation.
The contracts are sold to landowners? What if they don't want to buy? Why would they? They can't influence default risk, since they only control a fraction of a species' habitat. The only incentive to buy would be to resell these derivatives to clueless environmentalists.
Victurine said the idea was well-received at a conference ..., but that the audience didn't quite grasp the detailsThey liked the idea but didn't understand it? Sounds like a meeting of Fortune 500 CEOs.
Well, I don't understand it either, or can it be possibly that bad?
A standard cap and trade system may work for localized species though.
Posted by: Ethnic Austrian at Feb 26, 2009 3:06:21 PM
Hit the Winski link. The "I'm bored" part is well worth a visit...
Posted by: missmarketcrash at Feb 26, 2009 6:04:23 PM
So, we can now make loads of money by betting against these securities and making sure the endangered species don't survive?...
One word, awesome!
Rifle! Check!
Pesticide! Check!
Shovel! Check!
Quicklime! Check!
---------------
$$$$$$$$$
Awesomeness
Hopefully this will be the end to those annoying endangered species that keeping us from doing stuff I can hopefully finally eliminate them while making money then roll around in the money while cackling gleefully!
Posted by: DocMerlin at Feb 26, 2009 6:55:38 PM
Ok, despite my above tongue in cheek response. I think this is a bad idea. We need two requirements for this sort of system to work.
1) Direct link to personal responsibility for the good.
2) Money to be made on the good's continued well-being, creation, etc.
Condition number one keeps a tragedy of the commons from happening, and condition number two keeps someone from destroying the good for profit.
A securities style good simply doesn't do either of these. There is money to be made both on the short and on the long, so it fails condition two. The holders of the security are also not responsible for the condition of the creatures directly, so it fails condition one.
A better alternative if all you want is for people to keep species alive is to allow farming for that creature or keeping the creature as a pet. For example, if polar bear fur was farmed for, we wouldn't lack polar bears. A successful example is Bengal tigers; it is estimated that there are more tigers in texas in zoos or kept as pets than there are wild in india.
Posted by: DocMerlin at Feb 26, 2009 7:12:32 PM
Ok, despite my above tongue in cheek response. I think this is a bad idea. We need two requirements for this sort of system to work.
1) Direct link to personal responsibility for the good.
2) Money to be made on the good's continued well-being, creation, etc.
Condition number one keeps a tragedy of the commons from happening, and condition number two keeps someone from destroying the good for profit.
A securities style good simply doesn't do either of these. There is money to be made both on the short and on the long, so it fails condition two. The holders of the security are also not responsible for the condition of the creatures directly, so it fails condition one.
A better alternative if all you want is for people to keep species alive is to allow farming for that creature or keeping the creature as a pet. For example, if polar bear fur was farmed for, we wouldn't lack polar bears. A successful example is Bengal tigers; it is estimated that there are more tigers in texas in zoos or kept as pets than there are wild in india.
Posted by: DocMerlin at Feb 26, 2009 7:14:25 PM
On a timescale of millennia, species go extinct all the time. It's nature's form of creative destruction. How many went extinct the last time ice-age glaciers swept down to Texas?Conversely, there have been many periods with much warmer temperatures than today. The survival of any one particular marginal species doesn't matter that much in the grand scheme of things.
Posted by: at Feb 26, 2009 10:41:27 PM
This is the flip-side of Bob Murphy's point about cap-and-trade (creating scarcity where there may not be any). Just because some people "value" a species, unless they are willing to take the other side of the trade with their own money rather than pledging my tax money for me, then they are creating value where there isn't any.
It's fine if it's run out of the Chicago Board of Exchange. D.C., not so much.
Posted by: Andrew at Feb 27, 2009 12:54:58 AM
