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
Steve Varsano, founder of The Jet Business live on Bloomberg TV April 2013
Welcome back. You’re watching The Pulse. We’re live from Blue Books London headquarters. I’m Guy Johnson and I’m Francine Lacqua. Now, let’s get a perspective on the ECB and BOE’s upcoming policy decisions from a corporate executive. Stephen Varsano is f…
When there aren't gains from trade | Basic economics concepts | AP Macroeconomics | Khan Academy
So let’s say we’re in a very simplified world where we have two countries: Country A and Country B. They’re each capable of producing apples or bananas or some combination of them. What this chart tells us is if Country A put all of their energy behind ap…
Pedigrees | Classical genetics | High school biology | Khan Academy
What you see depicted here is known as a pedigree. A pedigree is a way of analyzing the inheritance patterns of a trait within a family, and it can be useful to understand more about that trait. Maybe to make some insights about the genetics of that trait…
40 Years Later, A Family Revisits Their Epic Canoe Trip | Short Film Showcase
[Music] As a kid, I loved listening to my parents tell stories about their adventures. One story in particular captured my imagination. In 1974, my parents and my uncle Andy built their own canoes and, against all advice, launched their boats into the Pac…
Peter Lynch: How to Invest in 2023 (RARE New Interview)
Mal Rushmore is one of the most popular historical landmarks in the United States. Carved into the side of a mountain are the faces of four influential presidents that changed the course of America forever: George Washington, Thomas Jefferson, Theodore Ro…
Finding zeros of polynomials (1 of 2) | Mathematics III | High School Math | Khan Academy
[Voiceover] So, we have a fifth-degree polynomial here, p of x, and we’re asked to do several things. First, find the real roots. And let’s sort of remind ourselves what roots are. So root is the same thing as a zero, and they’re the x-values that make th…