The Economics of a Ransom

(Photo: Michael Mandiberg)

In The AtlanticMegan McArdle traces the economics of ransom negotiation:

Economists would describe hostage negotiation as a bilateral monopoly price negotiation that is structurally just a special case of chicken. That is, unlike a barrel of oil or a freight car full of soybeans which can trade on an extremely liquid market with innumerable buyers and sellers, a hostage has exactly one seller (the kidnappers) and exactly one buyer (the employer and/or family of the hostage). When there is only one buyer, the opportunity cost for ransoming the hostage is zero. Likewise, the employer and/or family has no realistic alternative means to recover the hostage. In order for everybody to walk away happy, we need a cooperate-cooperate outcome: the kidnapper has to give up the hostage and the employer/family has to give up a ransom.

Here’s one big tip from the article: if you’re ever kidnapped by Somali pirates, don’t tell them how much you’re worth.  It narrows the bid-ask spread.

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 19

View All Comments »
  1. Nathaniel Q says:

    Hidden due to low comment rating. Click here to see.

    Disliked! Like or Dislike: Thumb up 20 Thumb down 29
    • KH says:

      @Nathaniel Q :- But just what would you do if a member of your family became a pirate, and you had no control over them? Hope you like the thought of being imprisoned because of other peoples actions.

      Well-loved. Like or Dislike: Thumb up 32 Thumb down 5
      • Patrick says:

        Everyone acknowledges that they would spend any money they could get their hands on to pay for a family member taken hostage. But paying ransoms puts future people in danger, as the bigger the reward for hostage taking, the more hostages will be taken. Your ransom money pays for hostage takers to have the means to kidnap others. In that light, a scorched earth policy can be the most humane.

        Well-loved. Like or Dislike: Thumb up 16 Thumb down 0
      • James says:

        “Everyone acknowledges that they would spend any money they could get their hands on to pay for a family member…”

        Not everyone. I can think of several people whose families might not pay all that much to get them back, and one or two who might actually pay the pirates something to keep them.

        Well-loved. Like or Dislike: Thumb up 13 Thumb down 1
      • Rick Forrest says:

        Hidden due to low comment rating. Click here to see.

        Disliked! Like or Dislike: Thumb up 4 Thumb down 9
      • kilroy says:

        It’s logical, but not necessarily humane. For it to be the humane choice, you’d have to value future victims lives the same as your own family. That’s pretty much the exact opposite of what Love is.

        Thumb up 3 Thumb down 2
      • Seth says:

        “For it to be the humane choice, you’d have to value future victims lives the same as your own family”

        Except that its not the policy makers’ families involved. For the family, of course they value their loved one’s life over those of abstract future victims. For society, which should value each member equally, the humane choice is the one which leads to fewer kidnappings long term. Its not the life of the system vs. the life of the hostage, its the creation of what basically amounts to an attractive nuisance – a system that makes kidnapping profitable. THAT is inhumane.

        Well-loved. Like or Dislike: Thumb up 7 Thumb down 0
    • RJ Roy says:

      Ah, the favoured tactic of the dictator against dissidents. We’ve seen in the past how well that’s worked.

      Oh wait…

      Thumb up 0 Thumb down 1
    • Stephen says:

      The last ‘graph in the story is worth noting:

      “Oh, and one more thing about Caesar. Plutarch tells us that after he was ransomed he got some ships, raided the pirates, and had them all crucified.”

      The U.S. has raided pirates in the past (see, for example, http://en.wikipedia.org/wiki/First_Barbary_War), as have other nations. It’s just a question of budget and political will.

      Thumb up 3 Thumb down 0
    • James says:

      Why this unthinking assumption that everyone loves their family members and will either pay as much as they can raise to get them back if they’re kidnapped, or not become a pirate because it might endanger them?

      Though acting against families goes too far (and may well be ineffective), a “scorched earth” policy against pirates and those who aid them seems to have much to recommend it. At least it appears to have worked against the Caribbean pirates.

      Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
  2. Courtney says:

    The author of the post is Gabriel Rossman, a sociology professor at UCLA who is guest-blogging for Megan McArdle.

    Thumb up 2 Thumb down 0
  3. Jon says:

    “if you’re ever kidnapped by Somali pirates, don’t tell them how much you’re worth. It narrows the bid-ask spread.”
    That assumes that no murder takes place at all.
    If the hostage has little monetary value, the pirates can always choose to kill that relatively less worthy hostage and move on to the next one because those pirates can fetch a higher value, at low risk too because these pirates might have already violated several international laws.

    The simple implication is that the random must not exceed the buyer’s ability to pay up while satisfying the seller’s desires, an unlikely equilibrium.

    Thumb up 4 Thumb down 0
  4. James says:

    Off the subject, but does anyone know why the Atlantic doesn’t use a standard character set? That looks like an interesting article. I’d like to read it, except than in my browser the first sentence displays as “undefinedundefinedLessons from Plutarch to Planet Money, including the First Rule of kidnapping insurance: Don’t tell anybody about your kidnapping insuranceundefinedundefinedundefinedundefinedundefinedundefinedundefinedundefinedGabriel Rossmanundefined — undefinedSociologist at UCLA.” This is common to every Atlantic article I’ve looked at, and shows up only in Atlantic articles.

    Perhaps a topic for a future post: how much business is lost when some entity decides to use non-standard features like this?

    Thumb up 2 Thumb down 0
    • Eric M. Jones. says:

      Hidden due to low comment rating. Click here to see.

      Disliked! Like or Dislike: Thumb up 0 Thumb down 5
  5. Ali says:

    Not sure I agree with the going rate doesn’t matter: doesn’t it help reduce asymmetry of info?

    Thumb up 0 Thumb down 0
  6. Tony says:

    Check out the french movie “Rapt” that deals with this topic.

    Thumb up 0 Thumb down 0
  7. frankenduf says:

    reminds me of the jack benny joke about a robbery:
    ur money or ur life!
    (pause)
    im thinking…

    Thumb up 1 Thumb down 1
  8. AC says:

    I have to say Jon makes a point: if you’re worth nothing, they’ll just kill you.
    But (extreme cases aside) it’s true that it would be hard to argue against a family and tell them not to pay a ransom just because paying it might have as a consequence someone else’s kidnapping (and maybe murder). I do agree that something has to be done to stop piracy. Not sure letting them kill their next 20 hostages will do though.

    Thumb up 1 Thumb down 0