yego.me
💡 Stop wasting time. Read Youtube instead of watch. Download Chrome Extension

Incentives for DROs not to go 'rogue'


3m read
·Nov 8, 2024

There are two dispute resolution organizations or Dr. Alto and Tenna. Tenna and Alto have both been in business for a while. They're both well-respected firms. Both have similar amounts of capital and similarly sized customer bases. They have mutual agreements for procedures for efficiently resolving disputes between clients with the other firm. So, reciprocity agreements basically they have agreements not to impede each other in their work unless the defense of their clients demand it. They have an agreement that disputes between themselves will be resolved using a third-party arbitration organization, Alpha ARB. All these agreements have been useful in gaining trust from customers and suppliers so far.

One day, an evil consultant arrives at the Tenna headquarters and sketches a plan that Tenna could use to get ahead of Alto. Tenna could charge customers a large fee but, in exchange, enable them to profit by defaulting on prisoners' dilemma situations. Tenna would achieve this by using force to block the victim's DRRO, which is Alto, from enforcing the contract. The defaulting Tenna customers would gain more from defaulting on the prisoners' dilemmas than they would have to pay to Tenna in fees. So, on paper, Tenna and its customers would profit at the expense of Alto and their customers.

But the chief of Tenna isn't at all impressed with the plan, and he explains to the evil consultant why it wouldn't work. First of all, Tenna doesn't yet have the extra capital that the plan would deliver, so its means are similar to the means of Alto. Having many units on constant standby ready to mobilize against Alto at any time would increase the cost of running Tenna considerably. Also, if Alto retaliates against Tenna's attempted blocking, there's a high risk that Tenna's forces will suffer the loss of agents and equipment, which is even more expensive.

More importantly, Tenna will be breaking multiple critical contractual agreements. The first time it blocked Alto from enforcing a contract, Alto would immediately open a dispute with the two firms' previously agreed-upon arbitrator, Alpha AB. Alpha AB's motivation to protect its reputation as a fair arbitrator would lead it to rule in favor of Alto. If Tenna refused to pay the hefty penalty issued by Alpha AB, it would find itself with an irreparably damaged trust rating and in virtual economic isolation. It would effectively be an outlaw organization.

Tenna's customers, acting in self-interest, would cancel their Tenna subscriptions and flock to Alto because other organizations on whom they depend, like insurance companies, banks, etc., all stipulate that their clients must be subscribed to a WH list DRRO, and Tenna is now on the blacklist. Tenna would quickly end up with no customers and no supply of money to fund a battle against Alto.

The point of this story is to illustrate that an analysis of the incentives for a DRRO to aggress against another in order to profit shouldn't ignore the indirect knock-on effects of that aggression on a network of cooperation agreements. Of course, with enough capital, maybe Tenna could still seize power, but in the kind of society I've sketched, I don't think it will be nearly as easy or as likely as Randy's analysis suggests.

More Articles

View All
Big Data by the Numbers | Explorer
I’m Richard Bacon. Let’s talk about surveillance. But let’s do it quietly because they’re probably listening. That thing in your pocket that you call a smartphone, it’s a tracking device that just happens to make calls. Digital tracking has become a part …
Private vs first class.
If you had the choice between flying private or flying first class, which would you choose? Private, 100% of the time. Flexibility, security, safety, quality of life, time. You can leave when you want to go, what airport you want to go to and from. It’s …
15 Money Secrets They Don't Teach You In School
The school system is designed to keep people poor and mediocre. It was never designed so you could become rich and live a life full of prosperity. It was designed to raise employees that are obedient and never dream big. And if you want to change that pro…
Mr. Freeman, part 48
What are you looking at? You think I don’t know who you are and why did you come to our disco? Or you have something that is unknown to us? Of this yelling to make everybody free begins to spin our guts. Why you came to bothering us again? Eh? Before you…
Warren Buffett's GENIUS Options Strategy... (The Wheel w/ @PetersonCapitalManagement)
2020 is shaping up to be a record year for stock options. Options are the kinds of bets where you can lose everything. Options are riskier than stocks. I’d wake up to 20, 30, 40, even a 60,000 loss. Options activity hit a record high in 2021. Individuals …
ANNOUNCEMENT Smarter Every Day Podcast - "No Dumb Questions"
Hey, it’s me Destin, from Smarter Every Day. Welcome to the No Dumb Questions podcast. This is not Smarter Every Day. When I create videos for Smarter Every Day, I’m usually thinking by myself. Think of it like a creative work of mine. It’s an effort to e…