By Eric Crampton 03/10/2018


I’ve been absolutely loving Tyler Mahan Coe’s podcast series on the history of country music and the country music business. Every story is fascinating.

A lot of the stories aren’t good for the kids. But I played the one about the Louvin Brothers (nee Loudermilk) for the kids. I paused it after this bit too see if they could figure out what was going on. Can you?

Charlie Loudermilk and his big brother, Ira, hated every day of picking cotton except one. That was the day Colonel Loudermilk took the three oldest kids out to the field, right at sunup, and showed them all a $5 bill. He said whoever picked the most cotton that day would get to have the money. $5 might as well have been $500 to these kids; they hit the cotton rows at top speed. They’d have spent the entire day in the field anyway but the idea of that $5 bill had them too busy to think about the aches and pains of picking cotton as fast as they could. At the end of the day, Charlie had picked the most. He was shorter than the other two, an advantage when it comes to picking cotton. Charlie got the money and then all the kids got a lesson in how dumb their father wasn’t.

Eleanor’s first guess was that the kids all worked so hard put together that it was worth more to their dad than the $5. Good guess – she got the intuition of the all-pay auction.

But that wasn’t it at all. Could the kids’ extra effort on that one day, combined, be worth $5? In the 1930s?

The real reason is also the reason that I’ve loved the idea of outcome-based contracts with NGOs for service delivery.

And here it is.

Colonel said, now that he knew how much cotton they could pick in a day with the proper motivation, they’d better pick that much every day or they’d get a different type of motivation come sunset.

For the low low price of $5, across the set of them, the kids had revealed their production function.

A big part of Ministries’ information advantage over Ministers is that, even if they don’t really know their own production functions, they’ve got a better idea about them than the Minister does. That information can let them bundle up packages of things the Minister cares about with things the Ministry cares about and put them up as a combined bundle – that’s the old Niskanen argument with Breton and Wintrobe.

Getting NGOs on outcome-based contracts can reveal information about the true lowest cost production functions, and let the Minister hold the bureaus to doing it no worse than that, just like the Colonel could then do with Charlie and Ira.

The Ministries, having a few folks more cunning than the Loudermilk kids, have done a good job making sure that outcome-based contracts don’t get anywhere. I’m not sure it’s an accident that there’s no particular capacity in the public sector for writing the contracts properly, or that the last bureaucracy managed to let the first attempt at social impact bonds die.

Back to our dinner table, I can’t remember what the kids’ second guess was about the $5 contest after Eleanor’s guess of the all-pay auction. But Ira got it on their third guess – that Dad would know, forever, how much work the kids could really do if they were trying hard. And that might be more expensive than the $5 prize.

I didn’t ask them what the kids’ best response to that should have been. I’m happy if they do draw out the general implications, but I don’t want to deliberately screw up the tendering system I’m running with them for the chores.

But do go listen to the podcasts. Fantastic history of 20th century America, the music business, how the Opry worked… on that last one, I can imagine a chapter of an industrial organisation textbook written around it. Great stuff. Start at the start of Season 1 and work your way through.