The collective action problem and true costs

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Observers who dig even a little into government policy in areas like tariffs or taxes might note some peculiar features. Regulations are often crafted to provide benefits to a favored constituency, while the corresponding costs are borne by the broader population in some opaque way that individuals can’t discern. As a result everyone ends up paying slightly more for healthcare, or cars, or chocolate bars, while the folks who sell those things get some economic protection.

Yet the sum of those costs can far exceed the gains being captured by the target group. For example, tariffs on certain raw materials like sugar might end up saving a few existing jobs, but at a total annual cost that’s much higher than the salaries of the workers being protected. In effect they impose an implicit tax of $100 so that someone can receive a benefit worth $50. Why not instead just give the beneficiaries $50 directly, have the rest keep the remaining $50 in their pockets, and in the process let everyone be better off?1

Economist Mancur Olson was one of the first to formally treat this problem, recognizing how many objectives we aim for have concentrated benefits and diffuse costs. This makes it easier for the few who stand to gain to organize and get what they want, while the many who will be slightly inconvenienced lack a good way to advocate for their own interests. What’s more, agitating for that hypothetical direct transfer of $50 mentioned earlier sounds like a stickup, making it obvious to everyone what’s really happening. A policy change can get it done in a roundabout but palatable way, and burning that additional $50 is just the price of this approach.

The handshake problem makes these effects even more likely to occur as populations grow, as pockets of special interests can compete to draw on the resources of the whole without the mutual accountability that would keep them honest. A smaller group of stakeholders can make out very nicely, and who’s really thinking about everyone else?

Stop your engines

Government isn’t the only arena where this contest plays out. In the corporate world, mergers and acquisitions are a notable area where narrow interests can overwhelm broader ones. Research has amply demonstrated that these maneuvers usually don’t generate promised synergies, yet that track record hardly dampens the ardor of their proponents. The history of such deals is replete with titanic misfires. Few destroyed more value than the blockbuster alliance between German automaker Daimler and its American counterpart Chrysler.2

Touted as a revolutionary transatlantic combination of Teutonic engineering prowess with a mass-market leader, the resulting chimera did not get remotely close to this vision. The combination ended up mashing two incompatible cultures together in an ill-fated attempt to expand the empire of a coterie of executives, plus their attending army of bankers and consultants and sundry advisers who stood to reap hefty fees. The deal managed to be simultaneously of dubious strategic merit, poorly implemented, and timed to coincide with an inflating stock market.

At one point the market capitalization of the combined firm was worth less than that of Daimler alone, implying that it managed to both swallow up and incinerate the entire value of its target.3 After eight years of flailing Daimler was forced to extricate itself from the deal and return more or less to the status quo ante. In this case a subset of leaders was able to steer the resources of two massive organizations in ways that advanced their own objectives, despite the fallout for everyone else, employees and shareholders alike.

This group pursuing its own interests can even have a size of one.4 WeWork once captivated the media as a dazzling unicorn but turned out instead to be a much more common animal, serving as the grubby expression of its founder’s unbridled ego. Management structures and board decisions were harnessed to advance the interests of a single person, without adequate consideration for the ramifications beyond him.

One man could advance his interests in being king of the world at the expense of the whole. Thousands of employees were hired and acquired along the way as the company snapped up firms with only the most tenuous connections to its unglamorous office rental business. In the end it was the staff plus some bamboozled investors that ended up bearing the costs.5 While the firm now staggers towards a painful reset, its former leader walks away with reputation shattered but bank account intact.6

Cost accounting

It’s not just international trade or flashy startups—advancing narrow needs while offloading costs appears on the smaller scale as well. Corporate IT departments impose draconian restrictions that chop up everyone’s workflow to make system administration slightly easier. Instead of investing in more precise interventions, risk management makes staff go through tedious compliance trainings, ignoring the heavy time burdens. Hoarding resources or information makes overall performance worse off but helps those few with access shine when it comes time for reviews. Conforming to the idiosyncratic dictates of a senior leader requires all employees to work in a suboptimal way, yet it makes him marginally more efficient.

Effective leaders understand the choices they make or the policies they design have costs, many of them hard to calculate and paid in the long term, whereas the benefits can be obvious and immediate, with eager recipients clamoring for them. Given enough latitude, some smaller groups might even steer the whole enterprise over the cliff, wittingly or not. A core task is figuring out the true impact of various initiatives and making sure it corresponds to benefits that are lumpy in their distribution.

For a leader, consider three implications when handling this problem:

1. The voiceless may be quiet but their concerns still need to be addressed. Effective leaders see the bigger picture and act accordingly. They feel the obligation to manage for the broader good and not just to placate the noisy, especially as they rise in responsibility. This is particularly tough for politicians, as they may owe their positions to the loudest ones. Still, the most passionate aren’t necessarily the most important.
2. Opportunity arises where the benefits and costs are poorly matched or unfairly distributed. Accounting for them more fully could allow for an enterprising politician or leader to innovate in how a policy is implemented, potentially lowering costs. Instead of requiring everyone to pay a hidden tax in money or time, what else could you do with those resources? Had WeWork’s funders exercised more careful oversight, they would have now had an extra $1 billion to right the ship, instead of paying it to the founder as a ransom.
3. Everyone should care about, or at least understand, needs beyond their own. Invest in a culture where the big picture is front and center. You might back it up with rules and processes that prevent subgroups from going rogue, but making sure that all understand why they shouldn’t in the first place is more effective.7 The bigger the group gets the harder this becomes, which is why its easier to prevent narrow interests from hijacking a small town’s budget than it is to keep them from nibbling at the federal one.8

The cumulative effect of multiple narrow interests weighs on the common good and risks eclipsing the larger mission. How does your organization manage this challenge? What could you do individually to bring a broader perspective to collective decisions?

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References

Mancur Olson wrote about The Logic of Collective Action in a 1965 book with that name.

Harvard Business Review noted the failures of M&A in a 2016 article.

The Chicago Tribune covered the unwinding of the DaimlerChrysler merger.