4 ms·

Private Information and the Missing Markets for Financing Human Capital

27 points by elsewhen 5y ago

58x14 5y ago
Only read the abstract (rest behind paywall) but I have a lot of thoughts here. I speculate that coming years will see a significant increase in the fractional value vertical, encompassing material deliverables and performance prediction markets. Skill and knowledge acquisition is a speculative investment of effort, usually made from a hypothesis around expected value. "I will take X months to learn Y skill because Z industry is (stable, expanding, pays more, exciting)" is pretty parallel to "I will spend X $$$ for Y course/mentorship/degree because Z is..." Angels and VCs are often vocal about funding people and teams first, products after. Sentiment in talent acquisition is continuing to shift away from "do you have a degree and from where" and towards "what, how have you learned and what can you do." Remote, distributed work, freelancing models, and open collaboration structures like FOSS starkly contrast bloated enterprises and academia. I suspect there will be, and there probably are right now, numerous entities that pursue direct-to-consumer lending or crowdfunding based on various characteristics. Instead of taking on 6 figures in debt to join a 4 year program, only to spend unknown time to find suitable employment, take 5 figures of debt to account for your regular expenses, bootstrap your lifestyle, get paired with other members of the program, learn the same material in 2 years instead of 4 while also delivering a "product" and even if that fails, you're far more likely to have a collection of organic relationships that will endorse your job application. The commissions alone in the recruiting industry lead me to believe it's economically feasible to use these types of loans as a loss leader, in return for the network effects and valuable data that an operator could benefit from. And if 1 in 10,000 students launches a unicorn, the operator probably got in at seed or even as an angel, because they were able to watch all of the leading indicators that are currently extremely fragmented and subjective. A virtuous cycle emerges. I could go on... but I'll save it for somebody who ships.
- netaustin 5y ago
  I agree that a more practical future is likely if the government backs off its subsidies of "normal" college experiences. What we have in the U.S. is essentially collusion between higher ed and government to place excess value on such a normal college experience. This might not be such a bad thing, given the research outputs of many universities that benefit both from outright government grants, and implicit sponsorships in the form of student debt that carries interest rates lower than any private competitor could carry.
- asdff 5y ago
  I think a lot of the student debt debacle is bad decisionmaking on the part of the student thanks to how much financing is available. In short, since its become so normalized to put school on the credit card so to speak, you have people that don't bat an eye at 6 figures of student loan debt. I did a whole lot more than bat an eye at that, I opted for going to a public school in state and saved hand over fist compared to my out of state classmates. Even a school like Berkeley is only 14k a year in state, not much more than a cal state school. I think if people had less financing available they would just end up in less debt and somewhere in their respective state schools rather than spending massive amounts out of state.
netaustin 5y ago
My reading of the front matter is that, in essence, our present regime of student creates a problem of adverse selection. Adverse selection exists when two parties want to make a deal (sign a student loan), but one party knows much more about future performance than the other (the student). This makes transactions inherently very risky, as anyone who has taken private student debt understands as a fact of their interest rate. The US government bears the adverse selection risk in the interest of macroeconomic strength. But what if private parties could accept equity? That's to say, a percentage of all future salaries, as opposed to debt, which is a fixed amount per year on some schedule that produces interest income for the payee. The authors of this paper primarily found that private information — i.e. I know that I can earn a good salary with or without college, or conversely, I fear that I cannot — drives "Willingness to Accept" loans and thus prevents private markets that fund college tuition from taking hold. They appear also to support an expansion of college equity positions on the part of the government, although I did not dig deeply into that position. This is not an authoritative synopsis, I am merely an MBA with a long history in tech and an abiding interest in economic policy.
- fallingfrog 5y ago
  That’s called indentured servitude.
  - netaustin 5y ago
    I think that's a point that the authors of the paper are eager to test. If you believed you could escape a personally forecasted career trajectory by accepting an education instrument that was available as equity but not as debt, would you? I'm also not sure that a world that honors personal bankruptcy can be so simply associated with indenture.
  - barry-cotter 5y ago
    You're not wrong but you're probably trying to argue this is morally wrong. If it is morally wrong so are any loans for people to build human capital or skills, e.g. ones to go to university/college.
- 5y ago
bsldld 5y ago
Last year I too wrote a document that describes a way to provide loan free education: https://loan-free-ed.neocities.org https://loan-free-ed.neocities.org
- VinLucero 5y ago
  Great document. Any progress on implementation?
deleted 5y ago
[deleted]

27 points by elsewhen 5y ago

Only read the abstract (rest behind paywall) but I have a lot of thoughts here. I speculate that coming years will see a significant increase in the fractional value vertical, encompassing material deliverables and performance prediction markets. Skill and knowledge acquisition is a speculative investment of effort, usually made from a hypothesis around expected value. "I will take X months to learn Y skill because Z industry is (stable, expanding, pays more, exciting)" is pretty parallel to "I will spend X $$$ for Y course/mentorship/degree because Z is..." Angels and VCs are often vocal about funding people and teams first, products after. Sentiment in talent acquisition is continuing to shift away from "do you have a degree and from where" and towards "what, how have you learned and what can you do." Remote, distributed work, freelancing models, and open collaboration structures like FOSS starkly contrast bloated enterprises and academia. I suspect there will be, and there probably are right now, numerous entities that pursue direct-to-consumer lending or crowdfunding based on various characteristics. Instead of taking on 6 figures in debt to join a 4 year program, only to spend unknown time to find suitable employment, take 5 figures of debt to account for your regular expenses, bootstrap your lifestyle, get paired with other members of the program, learn the same material in 2 years instead of 4 while also delivering a "product" and even if that fails, you're far more likely to have a collection of organic relationships that will endorse your job application. The commissions alone in the recruiting industry lead me to believe it's economically feasible to use these types of loans as a loss leader, in return for the network effects and valuable data that an operator could benefit from. And if 1 in 10,000 students launches a unicorn, the operator probably got in at seed or even as an angel, because they were able to watch all of the leading indicators that are currently extremely fragmented and subjective. A virtuous cycle emerges. I could go on... but I'll save it for somebody who ships.

netaustin 5y ago
I agree that a more practical future is likely if the government backs off its subsidies of "normal" college experiences. What we have in the U.S. is essentially collusion between higher ed and government to place excess value on such a normal college experience. This might not be such a bad thing, given the research outputs of many universities that benefit both from outright government grants, and implicit sponsorships in the form of student debt that carries interest rates lower than any private competitor could carry.
asdff 5y ago
I think a lot of the student debt debacle is bad decisionmaking on the part of the student thanks to how much financing is available. In short, since its become so normalized to put school on the credit card so to speak, you have people that don't bat an eye at 6 figures of student loan debt. I did a whole lot more than bat an eye at that, I opted for going to a public school in state and saved hand over fist compared to my out of state classmates. Even a school like Berkeley is only 14k a year in state, not much more than a cal state school. I think if people had less financing available they would just end up in less debt and somewhere in their respective state schools rather than spending massive amounts out of state.

netaustin 5y ago

My reading of the front matter is that, in essence, our present regime of student creates a problem of adverse selection. Adverse selection exists when two parties want to make a deal (sign a student loan), but one party knows much more about future performance than the other (the student). This makes transactions inherently very risky, as anyone who has taken private student debt understands as a fact of their interest rate. The US government bears the adverse selection risk in the interest of macroeconomic strength. But what if private parties could accept equity? That's to say, a percentage of all future salaries, as opposed to debt, which is a fixed amount per year on some schedule that produces interest income for the payee. The authors of this paper primarily found that private information — i.e. I know that I can earn a good salary with or without college, or conversely, I fear that I cannot — drives "Willingness to Accept" loans and thus prevents private markets that fund college tuition from taking hold. They appear also to support an expansion of college equity positions on the part of the government, although I did not dig deeply into that position. This is not an authoritative synopsis, I am merely an MBA with a long history in tech and an abiding interest in economic policy.

fallingfrog 5y ago
That’s called indentured servitude.
- netaustin 5y ago
  I think that's a point that the authors of the paper are eager to test. If you believed you could escape a personally forecasted career trajectory by accepting an education instrument that was available as equity but not as debt, would you? I'm also not sure that a world that honors personal bankruptcy can be so simply associated with indenture.
- barry-cotter 5y ago
  You're not wrong but you're probably trying to argue this is morally wrong. If it is morally wrong so are any loans for people to build human capital or skills, e.g. ones to go to university/college.
5y ago

bsldld 5y ago

Last year I too wrote a document that describes a way to provide loan free education: https://loan-free-ed.neocities.org https://loan-free-ed.neocities.org

VinLucero 5y ago
Great document. Any progress on implementation?

deleted 5y ago

[deleted]