Advice Worth $1 Billion

Usually, when people talk in terms of billions of dollars, they are referring to macroeconomic questions. Recently, however, three economists (Jeremy Bulow, Jonathan Levin, and Paul Milgrom) were hired as consultants to advise a group that was bidding in a spectrum auction that would allow them to provide wireless service.

By following the advice of the economists, the group was able to purchase wireless coverage for the United States for $2.4 billion, while their major competitors ended up paying $3.5 billion for the same spectrum in the same auction. Thus, their advice was worth more than $1 billion to their clients.

Unfortunately for the economists, they were not paid as a share of the value they generated. They got a flat fee that was many zeros short of what they could have earned if they had negotiated a different contract.

The ultimate proof that these guys are academics at heart: they wrote up the results in an academic paper, giving away their billion-dollar secrets to anyone who wants them.

I’ve talked to one of the authors, however, and he says they have more secrets up their sleeves. He also told me that if I could convince a future client to sign a contract that made the consulting fee a share of the value they add, he would give me a piece of the action. So if you have any plans to bid in a spectrum auction anytime soon, please contact me.


If your consultants eat up that much of the savings, there's less and less incentive to get good (or any) consultants. The value of BEING a good consultant also declines. Better for everyone if consultant fees are kept somewhat lower.


Wow, how easily you forget the market when pondering your own earning potential.

How many other people in the worldcould have offered the same advice? We only need but a handful for them to get into a bidding war and have their fee drop to marginal cost: the time they spent thinking.


Pareto optimum!

I love a story with a good ending.


The Indian Government is just about to open the bid's for the 3G mobile spectrum(India has the second largest number of cell phone users across the globe!!). Bet a lot of bidders here wouldnt mind cost saving consultations for a piecie of the pie.
There, I have directed you towards the action. Good luck!!


science minded

Am happy to hear there are others who understand that it is not all about money.


I'm not sure Helen's comment makes sense. If a consultant gets paid a small percentage of the value they generate then it's in the best interest of the consultant to provide the greatest value. Similarly a sports agent gets paid more for negotiating a larger contract which benefits both the agent and his client.

As for a bidding war for consultants, I'm skeptical that a group investing Billions of dollars would consider a consultant's FEE over the consultant's ability or reputation.

Αμάτι Nώνυμος

A good example of double accounting obscured by smoke and mirrors. The spectators easily see the enormous profit generated by the consultant but fail to see the enormous risk of taking advice from the consultant. Will then the consultant first agree to one billion dollars of professional liability. Will Loids of Londinium insure him from malpractice? Will insurance premium include tail out policy and for less than consultant's take?

Sharing in profits does not stop at point zero. In a rectifier circuit?

Hey, man! How come you got over 2^10 responses for your name-five-city's blurb but only a lucky seven for your double accounting?

You in the wrong neighborhood


Great post. Steven, I wonder what you think about the likelihood that market forces explain why economists can't get (so far) a piece of the pie (along with the fact that bidders may not be able to select ex-ante the economists that will add value)?

On another note, there is an issue with "Value Added" compensation, in that it could give economists an incentive to encourage overbidding, in order to maximize the differential (value added), as opposed to minimizing the costs to the firm for which they consult?
However, in an oligopoly, this may not be such a bad thing for their client, because it empties the pockets of the other firms more...


What if the advice would have led to overpaying? Are the economists ready to bear a part of the burden of over payment too? i guess not.
I think they were themselves not sure if the trick would work and hence not negotiated a fair share deal in advance.


Mukesh -- this alone is not justification for not getting a performance fee, which in reality is an option on their value added (which can be negative).
Hedge fund managers have been successful at negotiating them, and still are, to a lower extent, amid the financial crisis.

bhupendra dubey

well, they(consultants) are authors and are authors on their own accord.. So even writing and publishing is their job which gets them fame and popularity...And stories like this one, will surely, help their buisness , because now they can buy better deals for themselves with this popularity.

So its like you are advertising your self ..and nobdy gets paid for it....but yes , it will increase their market value..

so to them, Raise your ante now!!!
best of luck!!!!!!!!


I think this type of incentive only works well if the consultant shares the same risks as the client. The worst the consultant can do is not get paid. If they have many clients, it's worth it to them to take high risks because the payoff can be high, even if one or two fail. But what if the client company risks going out of business, or losing a competitive advantage that may last for years? This is similar to the incentives of CEOs that led to the recent bubble bursting. If 9 out of 10 years they made buckets of money on their stock options, it was worth the risk to them, even if in the 10th year they made nothing or lost their jobs. But the risk was different for the companies that went bankrupt.


Here's a better analogy for the incentives and risks. Suppose there is an investment manager that has many individual clients. The manager gets paid a percentage of any profits for each calendar year. Now he has an incentive to do well, but also to take risks, use leverage, etc. He'll make enough money on the 9 out of 10 good years to make up for not getting paid the year the market crashes. His clients, however, might disagree.


complex post. due one decimal where I quarrel with it. I am emailing you in detail.