15.11.05

TRANSACTION COSTS. Timothy Burke has a bad day shopping. Frequent buyer clubs and extended-warranty plans provide great irritation.
Leafblower bought from dying chain store. Guy who rings me up: “Your leafblower comes with a two-year warranty, but for a mere…” Me: “I don’t buy extra warranty coverage, thanks.” Him: “I haven’t finished yet.” Me: “I’m not interested, thanks.” Him: “It’s only $30.00 [about 25% of the purchase price] for an additional two years of coverage, with free replacement of your blower in the last two years of coverage if anything goes wrong.” Me: Silent stare. Him: “So shall I add the protection plan?” Me: “No.” Him: “It’s a great deal.”
Yes, it is a great deal, for the store. The very fact that it makes the offer strongly suggests the protection plan is a sucker's bet. That leaf-blower will most likely fail during the regular warranty or some time after the protection plan expires, where "some time" might mean that thing is blowing leaves right up to the Big Crunch.

I, too, find many of the offers of stuff that securitizes future failures of the appliance annoying. There must be a theorem in economics somewhere to the effect that a leaf blower bundled with a chance of failure must be inferior to a leaf blower bundled with a contingent claim in case it fails. That sounds like a step toward the Arrow-Debreu states of the world economy. (Sorry, that last sentence is a bit Teutonic. We're dealing with claims contingent on different outcomes, or states of the world, not globalization.)
So the complete Arrow-Debreu model can be said to apply when goods are identified by when they are to be delivered, where they are to be delivered, and under what circumstances they are to be delivered, as well as their intrinsic nature. So there would be a complete set of prices for contracts such as "1 ton of Winter red wheat, delivered on 3rd of January in Minneapolis, if there is a hurricane in Florida during December". A general equilibrium model with complete markets of this sort seems to be a long way from describing the workings of real economies.
Quite so, because the Great Separating Hyperplane apparently allocates no resources to drafting the contracts and valuing the contingent claims. Fading Department will write an incomplete contract for "1 leaf blower, delivered November 13 somewhere in the east, with repair or replacement if you have paid $30 and we're still around to honor the contract when the blower fails."

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