Stepping outside the norm, a recent Econtalk episode discussed the economics of kidnapping. The question at issue was how kidnappings are often resolved without anyone suffering too greatly. The answer to this question was more or less that market forces have adjusted to such a grim reality and have created solutions accordingly.
Just as there is car insurance, or home-owners insurance, there is now kidnapping insurance. Anybody who travels into a kidnapping-prone area can have their company choose to purchase kidnapping insurance, which will safeguard them against potential peril. Of course, the fact that solutions to kidnapping situations invariably crop up is something that should give us pause. Anja Shortland, the aforementioned guest, runs through a litany of roadblocks that such solutions could face.
Among the plethora of issues that one could encounter, Shortland lists the following: the lack of receipts, the reluctance to release a witness to the crime, and the general volatility of criminal dealings. Against this backdrop, the prospect of peacefully resolving kidnapping disputes seems quite low. However, Shortland explains how markets have managed to devise an effective economic solution to kidnapping.
Put simply, her solution comprises in what she calls the ’shadow of the future.’ Kidnappers are encouraged to behave well since in the long-run they benefit more from cooperating than they do from defecting. On the one hand, if kidnappers cooperate, then they are virtually guaranteed to receive the requested money, legal concerns notwithstanding. On the other hand, if kidnappers defect (e.g. maiming or killing the hostage), then they risk not receiving the money for that particular kidnapping, but more importantly not receiving money in the future as a result of being untrustworthy. Specialist consultants in the kidnapping insurance industry are equipped with local knowledge of kidnapping gangs and are usually able to determine from past interactions whether they are trustworthy.
In practical terms this means that kidnappers are encouraged to cooperate and keep their promises because it is good business practice. Most kidnappers around today are therefore likely to cooperate, since the businesses that didn’t cooperate most likely went under. Kidnapping insurance more or less ensures that trustworthy kidnappers are kept comparatively harmless and untrustworthy, while violent kidnapping business go bankrupt. As Shortland puts it, kidnapping insurance ‘orders the market.’
Of course, there have been doubts as to how effective kidnapping insurance could be at mitigating risk, given that kidnappers could be incentivized by near-guaranteed returns. This objection, in other words, amounts to a concern that financial guarantees from insurance markets may encourage new kidnappers to enter into the market. As the critic may invariably note, incentivizing criminal behavior is not a desirable outcome. However, such a criticism overlooks how an increase in incentives to kidnap is also accompanied by a far better overall strategy for dealing with kidnappings. If the main benefit of kidnapping insurance is that 97% of kidnapping victims are returned safely, then kidnapping insurance is, on balance, a net positive. After all, our main concern with kidnapping is returning victims home safely as quickly as possible. And insofar as kidnapping insurance accomplishes this goal, kidnapping insurance is successful. By these standards, kidnapping markets have been a resounding success.
Nathan Bray is a research intern at the Adam Smith Institute.