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
Recognizing quadratic factor methods
We have other videos on individual techniques for factoring quadratics, but what I would like to do in this video is get some practice figuring out which technique to use. So, I’m going to write a bunch of quadratics, and I encourage you to pause the vide…
Multiplying whole numbers by 10 | Math | 4th grade | Khan Academy
Multiplying by 10 creates a really neat pattern with numbers, so let’s try a few out and see if we can discover the pattern. Let’s try to figure it out. We’ll start with one that maybe we already know. Let’s start something like 2 * 10, and maybe we know …
Why I'm Finally Spending Money
What’s up you guys? It’s Graham here. So, a little over a year ago, I made a video breaking down exactly how much money I spend every month, where it all goes, and my philosophy is when it comes to saving money, investing, and trying to get the best value…
Monetary policy tools | Financial sector | AP Macroeconomics | Khan Academy
What we’re going to do in this video is think about monetary policy, which is policy that a central bank can use to affect the economy in some way. This is often contrasted with fiscal policy, and that would be a government deciding to tax or spend in som…
Homeroom with Sal & Eric Schmidt - Tuesday, November 17
Hi everyone! Welcome to Homeroom with Sal. We have a very exciting show and a very exciting guest today, Eric Schmidt. But before we jump into that conversation, I will give my standard announcements. First, a reminder that Khan Academy is a not-for-prof…
Delicious Food in TOKYO VLOG
Hi guys, I’m Duty. I’m back with another Japan vlog because you guys seem to like them. We had a flight from Japan to Turkey, so we had to get PCR tested. Here’s us on our way to the lab that we’re gonna get tested. What I like about Japanese transportat…