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.

Nathaniel Q

The default option against pirates should be to attack the ship and try to take out every pirate on board, regardless of crew member hostages. Then, after identifying the bodies, imprision the families of the pirates. It would only take a few times of going through the process before piracy would plummet. Too harsh? Nope, we're dealing with pirates here. Nothing is too harsh.


@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.


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.


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


"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.


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?

Eric M. Jones.

I'd like to point out that publishing ANYTHING on this subject might be unwise and should probably be avoided.


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


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


reminds me of the jack benny joke about a robbery:
ur money or ur life!
im thinking...


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.

Voice of Reason

This is the Freakonomics-style positive externality vs. negative externality, or external diseconomy question. Similar to the club vs. the lojack argument, paying off the random helps your family, but hurts society in general, conversely, calling the cops and getting the criminals shot or arrested may get your family member killed in the crossfire, but will help society by discouraging that kind of criminal activity.

It makes more sense for a country to have a "We don't negotiate with terrorists" policy rather than an individual person. A country doesn't have emotional ties to people who are captured, and it's an entity large enough that it can spread the word that demanding a random will only lead to more trouble than its worth. Conversely, being the hero from a family's standpoint does not help get the ransomed person back, and even if you had more kids to kidnap, it would be unlikely that the word would be spread wide enough that you were stonecold when it came to ransoms.



There's are several logical errors with many of the comments here so I don't know where to begin. Consider that the hostage is Louis Pasteur. Does the utilitarian argument work?