Over at Overcoming Bias, Robin Hanson blogs about a science fiction novel that posits a world where people routinely sell shares in their future income. (I have not read the novel, which is called The Unincorporated Man.) Robin laments that while many reviewers have taken it for granted that we wouldn’t want to allow such contracts, none seem to have seriously engaged the idea.
I’m not sure if this counts as serious engagement, but I am reminded of the apparently little-known fact that the singer/actor/TV phenomenon Dean Martin did exactly this. In fact, he overdid exactly this. By the time he was 27 years old, Martin had sold 10% of himself to MCA Records, 20% to his manager DIck Richards, 35% to his other manager Lou Perry, and 25% to the mobster Frank Costello. That left him with 5% of himself—“$50 for every grand he made” in the words of writer Nick Tosches. A year later, he hired yet another manager and sold him another 10%. Having now sold 105% of himself, it became imprudent to earn money. Therefore, in need of something to live on, Martin sold yet another 10% of himself to nighclub owner Angel Lopez.
It took two years of bankruptcy proceedings to untangle the mess and give Martin a fresh start. (The story is engagingly told in Tosches’s book Dino: Living High in the Dirty Business of Dreams.)
Is there something about this kind of contract that particularly invites fraud?
Steve,
I think you’ve done your sums wrong. 10% + 20% + 35% + 25% = 90%. This would leave Dean with 10% for himself, before selling this 10% to his other manager.
Not quite the same thing, but I recall David Bowie selling future royalties as Bowie Bonds.
Had he really “sold” these percentages of himself, or contracted them for services to be rendered? I presume his contract with MCA and his first manager could have been the normal sort of entertainment business contract, then things started to go a bit wrong.
In popular conception, it seems to be quite common for artists to sign away too much of themselves and end up penniless, whilst the manager / record company pockets all the profits. The stereotype is a naive young artist desparate to sign up to a record deal, and it takes a while for the artist to cotton on. The artist then implodes in drug fueled haze of disillusionment. However, in theory, this sort of contract allows the individual to personnaly earn much more than he could without the services he has contracted, so it can be a good deal for all. This is a bit different from selling your future earnings for cash.
As the seller, I would happily sell all my future earnings at “face value”. I could then retire and live on the investment as I would have no need to actually earn anything. The buyer would get zip. (Is the investment income earnings?)
As a buyer, I would only offer much less than face value for the above reason.
As a seller, why would I accept less than face value for my future earnings? Possibly I have a very pressing need for the cash now – the mobster may provide such an incentive. Otherwise it seems that I value my future happiness at less than my current happiness.
This brings us on to difficult areas of identity – is there really an “I” that procedes through my life? Is the future me the same me as the current me? Is identity an illusion?
There is a well known psychology experiment where children are offered one sweet now, or 3 sweets if they can wait say 5 minutes. It is intended to show that older children are wise enough to know that the 3 sweets in the future are a better deal, so they will wait. Perhaps the younger child has not yet accepted the illusion of identity, and makes the wiser choice by eating the one sweet straight away.
Al: Hmmm. You’re right. I got all of these numbers (including the total) from Tosches’s book and didn’t think to check the arithmetic. I’m not sure where the error is.
PS: Re-checking Tosches, I find that I omitted another 10% to bandleader Sammy Watkins, which seems to bring the total to 100, though Tosches says the total is 95. This eliminates the original discrepancy and introduces an equal and opposite discrepancy.
I don’t know about inviting fraud – in Dean Martin’s case, I assume there wasn’t a public registry where people could look up who had shares of his income already and how much, but if this were institutionalized such a thing would have to exist.
What I find more novel about this is that while it may seem similar to selling shares in a company or similar institution, it’s actually very different: A company’s “motivation” to produce income comes from the people who run it, who are enabled by and answer to those who invest; a person’s motivation to be productive and make money comes primarily from their will and self-interest. While a person may be *enabled* by investors, each such investment counterbalances that by proportionally reducing their motive to succeed. When we invest in something, we don’t think about our investment inherently damping down its profit motive.
Now, that said, I’m quite used to “investing” money in people in the form of loaning them a bit of money when they’re in need because I want them to succeed and having a bit more means would be a big help. But this is based on personal relationships, on knowing the person well, and on the fact that the return I’m looking for is their success for their own sake, not a chance to get back more money than I put in. On a mass scale, I think of some portion of government as a similar investment. But I don’t know that this model can be transferred to the kind you’re talking about.
Something like this is the essence the plot of “The Producers”, in which rights to a play are deliberately oversold, and the producers attempt to create a huge flop so they can simply keep the proceeds from the investors for themselves. I wonder whether Mel Brooks had Martin in mind.
dWj:
The discussion reminded me of _The Producers_ too. Zero Mostel was terrific in the stage version.
For another example of overselling, it was once legal to purchase an insurance policy for more than 100 percent of one’s loss. I believe that’s now illegal in my state because of what policy makers call “moral hazard.”
Whether or not it would invite fraud (as Cos says, all you need is a registry to look up how much someone has already oversold themselves), it would obviously invite laziness.
To put Cos’s point in economic terms, if you only own 5% of yourself, if you earn $100 per hour you’ll continue working until the marginal cost of the additional work exceeds $5, and then stop. Whereas if you own all your earnings you’ll work until the marginal cost of your additional labor exceeds $100, and then stop.
Which is, presumably, why we allow students to borrow enormous amounts of money for school, rather than selling shares in their future income. It’s not that we object to some third party having an enormous claim on you — if you borrow through medical school or law school, the school could have a claim on over $100,000 of your future income. But since the size of the loan is fixed, then the marginal benefit to you of working is whatever the free market will pay you for it (minus taxes), so you keep working until the marginal cost exceeds that.
If this policy was allowed, wouldn’t we just end up with a market for lemons?
I bet Dino worried the most about that 25% he owed to mobster Costello.
I think this policy is allowed, isn’t it? If someone wanted to sell a percent of their future earnings for a fixed sum, would there be anything to prevent it? The problem arises that no-one would want to buy, as as soon as you make the purchase, you reduce the future earnings as you have reduced the incentive. Australia perhaps comes closest, with students selling a percent of future income to pay back the student loan, but I think the extra tax stops once the loan is paid off. This sort of contract would only happen if both parties thought it preferable to a straight loan. I cannot immediately see how such a situation would arise.
The case of artist / record label is perhaps illustrated well by George Michael vs. Sony. He sold a lifetime commitment to Sony when he was 18 and desparate for a record contract. He likened it to slavery, wanted out and took them to court. He lost. The wikipedia article is not the best:
http://en.wikipedia.org/wiki/George_Michael_Vs_Sony
I remember hearing about a college student who tried to sell his future income on eBay; eBay removed the auction on the grounds that the seller violated part of eBay’s policy.
I’m not sure of the legal status of such a market, but I would guess that the market will never be very large because of the adverse selection problem.
Poker players routinely sell percentages of themselves. For tournaments, it’s pretty easy to avoid the tendency toward laziness because, having entered a tournament, it’s only very slightly more work to play your best that it is to play indifferently.
For cash games, I think the incentive problem is solved by the fact that players rarely sell 80-90% of themselves. Usually it’s more in the 25-50% range.
Such arrangements were so common for the last couple decades that for most big tourneys and high stakes games, the player who owned all of himself was quite the rarity, although it’s less the case these days.
I’m not sure Bennett’s example makes much sense. If you own 5% of yourself and earn $100 an hour you will work as much as someone who owns 100% of themselves and earns $5 an hour. I’m sure such a person works all the hours they can, probably trying to hold down 2 jobs, just to get by.
Good point Erick, how do we measure the marginal cost? If you have nothing, you will need to work enough to provide the basic necesities before the marginal cost reaches $5. Is this right? The more you work, the greater the marginal cost, and you keep going until the cost equals what you get for it. If you are used to earning $100 per hour, the marginal cost will equal $100 per hour after say 5 hours, so you stop working. At this point, the time is worth more to you than the money. However, lets say you then sell 95% of yourself and gamble it all away. On your previous view, the marginal cost would have reached $5 very quickly, so you would hardly work at all. However, under the new reality, the marginal cost of your time will not reach $5 until, perhaps 5 hours. After this amount of work you will now be able to eat and sleep in a dry place. You will just have to reduce your expectations.
PS. if you sold 95% of yourself and kept the money, your marginal cost would remain the same as your original view, so you would not work.
@ Nathan, do poker players sell percentages of themselves, or just their winnings? If they happened to come into an inheritance during the poker tournament,, would they have to pay the percentage of this?
Alas, many a good novel idea seem to have so far only actually been realized as attempts at fraud. Which of course makes reasonable people reasonably wary of novel ideas.