Nation of Beancounters

Incentives: Cell Phones and Kids Edition

Posted in Uncategorized by Navin Kumar on April 16, 2011

Raising kids is full of conflicts so it’s a good thing that we economists are around to help out.

One (minor) problem is cell-phones. It’s a classic externalities/imperfect information problem. The costs of losing or breaking a cell phone are externalised to the parent, who bears the costs of replacing it. You want them to internalize as much of the cost as possible but at the same time you don’t want to deprive them of a cell phone, if for no other reason than the sense of security and convenience it provides you.

One solution is to cut your kid the following deal: a nice new phone every 2 years. In the event that the phone is lost/damaged, get them a cheap low-end, feature starved phone (like this one, which is quite hardy). Thus the bulk of the costs are borne by the kid, solving (most of) the externality problem while keeping the him or her connected.

Of course, this causes an additional problem: keeping the threat credible. The loss of the phone isn’t always the kids’ fault, the tyke is going to claim it wasn’t (even if was)- and you have no way of knowing. Its’ hard to imagine a parent not being moved by (persistent) pleas of not-guilty. But if you give in once, the entire scheme falls apart. It’s like being a banker: even if this borrower is very clearly genuinely innocent, you still have to go hard on him otherwise you risk gaining a reputation for being a ‘soft’ bank and attracting less-than-genuinely afflicted borrowers. See adverse selection.

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