5 ms·

It incentivizes the purchaser to overpay.

gojomo 4y ago
Totally agreed, but still, finder's fees sometimes work that way – because the actual amount truly paid is considered the least-fakable proxy-signal of value delivered. Similarly, utility-style government regulation often caps profits (or profit-like 'overhead' like salaries) as a percentage of expenditures. This creates an incentive for doing things in an expensive manner. It's kinda dumb, and has been understood as a problem driving excessive costs in regulated industries for many decades. But the same thing was written into 2010's ACA ("Obamacare") as an "80/20 rule": insurers must pay out 80% of what they take in on certain preferred health expenditures, like medical procedures. So, the only legal way to grow the absolute size of the 20% an insurer must use for 'overhead' (including administrative salaries & profits) is to increase the totals paid for health services. That is, insurer management/shareholders can benefit when hospitals/providers charge them more. If the federal government habitually makes this mistake, can we blame Hsieh?
- thaumasiotes 4y ago
  > Similarly, utility-style government regulation often caps profits (or profit-like 'overhead' like salaries) as a percentage of expenditures. This creates an incentive for doing things in an expensive manner. It's kinda dumb, and has been understood as a problem driving excessive costs in regulated industries for many decades. The term for this is "cost plus". As you note, it has long been understood to be a big mistake. And as you also note, it continues to be common.
  - MichaelZuo 4y ago
    Not necessarily, for stuff that genuinely doesn't exist yet, such as cutting-edge military technology , or for situations where there's literally only a single potential bidder, cost-plus contracts are the least bad method I can think of.
    - thaumasiotes 4y ago
      They are significantly worse than the standard, extremely simple method of setting a budget and providing that amount of money.
      - MichaelZuo 3y ago
        So then it doesn't happen, or some extremely high price is offered to cover all potential risks. Like 5x or 10x the naive estimate. Which seems worse.

Totally agreed, but still, finder's fees sometimes work that way – because the actual amount truly paid is considered the least-fakable proxy-signal of value delivered. Similarly, utility-style government regulation often caps profits (or profit-like 'overhead' like salaries) as a percentage of expenditures. This creates an incentive for doing things in an expensive manner. It's kinda dumb, and has been understood as a problem driving excessive costs in regulated industries for many decades. But the same thing was written into 2010's ACA ("Obamacare") as an "80/20 rule": insurers must pay out 80% of what they take in on certain preferred health expenditures, like medical procedures. So, the only legal way to grow the absolute size of the 20% an insurer must use for 'overhead' (including administrative salaries & profits) is to increase the totals paid for health services. That is, insurer management/shareholders can benefit when hospitals/providers charge them more. If the federal government habitually makes this mistake, can we blame Hsieh?

thaumasiotes 4y ago
> Similarly, utility-style government regulation often caps profits (or profit-like 'overhead' like salaries) as a percentage of expenditures. This creates an incentive for doing things in an expensive manner. It's kinda dumb, and has been understood as a problem driving excessive costs in regulated industries for many decades. The term for this is "cost plus". As you note, it has long been understood to be a big mistake. And as you also note, it continues to be common.
- MichaelZuo 4y ago
  Not necessarily, for stuff that genuinely doesn't exist yet, such as cutting-edge military technology , or for situations where there's literally only a single potential bidder, cost-plus contracts are the least bad method I can think of.
  - thaumasiotes 4y ago
    They are significantly worse than the standard, extremely simple method of setting a budget and providing that amount of money.
    - MichaelZuo 3y ago
      So then it doesn't happen, or some extremely high price is offered to cover all potential risks. Like 5x or 10x the naive estimate. Which seems worse.