Jaké reformy a proč (203) Wawrosz: Feedback

27. srpen 2014 | 08.00 |

Následující příspěvk byl připraven na mezinárodní konferenci v Turíně a byl zde též přednesen. Obsahuje několik nových prvků oproti materiálům, které byly doposud v rámci diskuse zaměřené na přípravu pracovní části 17. ročníku konference Lidský capital a investice do vzdělání předneseny. Uveřejňuji jej na několik pokračování. Toto je čtvrtý z nich:

Transferred price and the sector of productive services as the key preconditions to smart, sustainable, and inclusive growth IV.

Petr Wawrosz, Radim Valenčík

6. How to use transferred price in sector of productive services

Economic theory (Valenčík and Budínský 2011) points out that in case the transferred price principle works on the basis of a three-way relation of the lender, borrower, and entity that provides productive services to the borrower, the lender is in a difficult situation. It is in his interest to monitor, whether the service provider really provides high-quality services, on the basis of which the borrower would get such human capital structure that would ensure the borrower's earnings are sufficient to repay his debt to the lender. Nevertheless, such monitoring is quite costly for the lender, whereas he may not be sure, whether his ideas about the borrower's investments are in fact met. This situation is referred to as information asymmetry (e.g. Akerlof 1970). In case the lender cannot eliminate such information asymmetry, he may not provide the funds to the borrower at all. Alternatively, the lender may request high interest rate during the period such funds are not being repaid or high share from the borrower's future earnings.

The given conditions may discourage some potential borrowers, particularly the low-risk ones, who may find the repayments unbearable. This situation leads to a vicious circle: the lender's loans are only sought by high-risk borrowers with lower likelihood of success. In case lenders to not provide loans to risk-free clients that could cover the losses of high-risk clients, their demands will continue to increase, discouraging other lower-risk borrowers. 

The situation discussed in the previous paragraph does actually occur in real life. The "My Rich Uncle” (MRU)[7] program offering loans to students in the USA covering their tuition fees and other costs of studying is one of the most remarkable examples. The company started its operation at the beginning of the 21st century, lending money covering the cost of university education directly to debtors (university students) at an annual rate of 7.85%. Borrowers had to return the principal and the interest over 10 to 15 years after the completion of their education. They had to pay a fixed rate of 0.1% to 0.4% of their gross annual income. Naturally, the owners of MRU did not have enough money to lend. MRU obtained funds from financial investors, who were not willing to continue financing MRU after the start of the financial crisis in 2008. As a result, the company filed for Section 7 US bankruptcy in February 2009 and suspended all its operations. The financial crisis was not the only problem that worried MRU. Even before the crisis its interest rate was higher than the rate of unsubsidized government loans. The company faced adverse selection: especially people who could not get government loans, i.e. people with a higher risk, were interested in borrowing from MRU. The delinquency rate of MRU clients was higher than the rate MRU investors were prepared to accept. The experience of MRU shows that the success of an HCC as a private market instrument depends heavily on the investors' willingness to give money for an appropriate time. Credit failure is quite probable in the time discrepancy between the period that investors are willing to lend money for and the period in which borrowers pay their loans. This was the case with MRU: investors gave the company money for a shorter period than the borrowers needed – borrowers could start paying money back after finishing their education (leaving school). MRU had to revolve its financial resources and could not do so during the crisis because of insufficient resources to continue revolving.

However, the solution of the aforementioned does not have to be complicated. The only thing that needs to be done is to directly involve the providers of productive services in their customers' success. How? It is necessary to ensure that the providers receive some of their customers' earnings. Therefore, customers will pay for the productive services rendered by means of the transferred price, i.e. certain percentage of earnings generated by the productive services. The contract between a customer and a provider may also define other parameters, such as: a) moment (together with other conditions), from which a customer shall start his payments (e.g. a customer must reach certain income level); b) period, for which a customer is required to repay his debt; c) circumstances, under which it is possible to suspend or discontinue the repayments, including a situation where the customer's earnings drop below a certain threshold; d) whether the payment is calculated from the customer's total earnings or only their part (e.g. difference between the customer's earnings and a minimum wage), etc. Therefore, the transferred price concept we propose comprises the following:

1. Provider of productive services acts as the primary lender. The provider may be an educational institution, medical facility, spa resort, etc. We may even assume that if individual providers of productive services, who finance their services by means of transferred price, operate in different segments (e.g. one of them in education and another one in healthcare), they will start cooperating, because the earnings of one provider also depend – to some extent – on the services offered to customers by the other provider.

2. Buyer "pays” for the provided service scheme based on the benefits of the acquisition, development, application, or preservation of his capabilities through the productive services system – i.e. he pays certain amount (e.g. 3 to 5% of his earnings) from his earnings after the service is utilized and usually after some income threshold is exceeded (a multiple of statistically expressed average earnings) either for a predetermined period of time (10 to 15 years), which settles the obligation (irrespectively of how much and when was actually paid), or until the full settlement of the debt (which may or may not be subject to interest).

In case the provider of product services is involved in the amount of earnings to be generated by his customers, whereas the amount of earnings is an effect of acquiring, developing or preserving human capital, as a result of which the customer has more and better capabilities, the provider will also try to provide the customer with such services that would develop and preserve his human capital and ensure the customer actually reaches the given income level. Naturally, some customers may fail to reach the given income level, thereby making no or only very low payments to the provider. However, in case the provider has many customers, the risk of the given loss (costs incurred by the provider in connection with providing the services to a customer) will be covered by the customers, who generate such earnings that would not only cover the provider's costs, including opportunity cost – i.e. including the provider's alternative returns, associated with the successful customers, but also the provider's costs associated with the unsuccessful ones. It is also necessary to underline the aspect of the long-term horizon. In case the provider of productive services receives returns from his customers for a relatively longer period of time, he will be committed to ensuring that the customers' knowledge, skills, and capabilities may be used for such prolonged period of time. This partly contributes to a long-term growth, and partly limits efforts aimed at short-term profits that may have negative effects in the long-run[8]. In case the customers of the productive services providers repay such services for a longer period of time using the transferred price, the following will happen:

-                      The given system allocates funds to the service providers associated with the acquisition of human capital, whose production is the most successful on professional markets. The providers' clients will logically prefer those providers, who will ensure the highest returns possible for them in respect of their investments.

-                      The given system "bridges” the specific "lender – borrower” relationship, which arises in connection with investments in human capabilities (e.g. a student / graduate, who "purchases” educational services and also acts as a borrower/debtor, and a university that acts as a "seller” and a lender/creditor simultaneously) and a capital market. This bridge consists in the fact that capital markets may be interested in purchasing contracts by and between customers and productive services providers – i.e. they may thus be subject to secondary valuation. In case the providers sell their receivables (even as a package of receivables) to capital market entities, they will receive the funds earlier. However, capital markets will only invest in contracts based on the transferred price, if they believe it might be beneficial. This will further promote the interest of the productive services providers in ensuring that their customers maximize their earnings, thereby maximizing the returns on the receivables of the providers from their customers, making them as attractive as possible for capital markets. The following applies in terms of the capital market entities: it is less costly to monitor a provider of productive services (one entity) than the provider's customers (many entities). It is easier for them to obtain information from the provider about the success of his customers. To some extent, this eliminates the problem of information asymmetry and the associated adverse selection problem[9].

-                      In case the productive services providers are truly involved in the success of their customers, it is safe to expect the characteristics of the sector of productive services described in Chapter 2 will be fulfilled. In other words, it will no longer be necessary to use the term "may” (e.g. "The production of this sector may lead to sharp and long-term increase in the productivity of labor employed within industry...”), but the theory will describe actual events (e.g. "The production of this sector leads...”).

7. Feedback of transferred price

The transferred price meets all the traditional price roles (e.g. Besanko and Braueutigam 2008), i.e. informational, allocation, and motivational role. The allocation and motivational roles consist in the fact that the provider of productive services is motivated to maximize the quality of its services in terms of its customer's success on professional markets, receiving financial funds based on the success of its customers on professional markets. The informational role is connected to the allocation and motivational roles: based on the earnings generated by the customers of the providers of productive services, these customers as well as other people interested in the given services get information about whether the given service is beneficial, to what extent is the given provider competitive in relation to other providers, etc. In terms of the informational role, it is also worth noting that the repayment of the customer's liabilities to a productive services provider may take place through a central registration system, which provides information to all system participants (in an anonymous and appropriately aggregated form) about the forecasted earnings for various productive services. It is safe to assume that successful providers will be interested in the establishment of such system, solely for the reason that it would be easier for them to generate funds from the capital market entities (in the above mentioned form of purchases of receivables of the productive services providers from their clients, or in the form of loans and investments made available by the capital market entities directly to the providers).

In terms of the standard roles of a price, the transferred price also provides feedback. It provides feedback not only to the productive services providers and to their customers, but also to third parties (e.g. capital market entities or other prospective/actual customers of productive services, existing and potential competitors, etc.). All entities learn about the profitability of investments in productive services, about the success of individual providers of such services. In terms of economic theory, the feedback falls in the area of microeconomics. It will allow optimal allocation of resources – productive services providers and their customers will invest in the services they believe to be most profitable for them according to the feedback[10]. Nevertheless, the feedback also has macroeconomic implications that contribute to the fact that the development of the given system, where productive services are provided, is in the form of sustainable growth, inclusive growth, and smart growth. Why is feedback necessary for attaining the given growth and why is the transferred price able to provide it?

1. Feedback is necessary for creating sufficiently motivating and competitive environment on the productive services market. The nature of productive services contributes to promoting competition. As a result of the services, economic activities may be performed by people, who would not be able to perform them or would only be able to perform them to a limited extent without such services given. Thanks to the capabilities, barriers to market entry are either eliminated or reduced for such people, leading to increasing production and reduced price. Naturally, the sector of productive services is also a market. In case entities operating on the given market receive feedback, they will be motivated to maximize the effectiveness of their activities, including environmentally friendly activities, activities that use minimum resources, are available to previously excluded population groups, etc. Aggregate activities of all entities operating within the sector of productive services will then generate smart, sustainable, and inclusive growth. Thanks to their impact on other sectors, with innovations generated through the sector of productive services contributing to growing productivity of such other sectors (see Chapter 2), the smart, sustainable, and inclusive growth may take place in all sectors – i.e. on the level of the entire economy.

2. The feedback is necessary to ensure that the provider of productive services, who significantly contributes to growth, can expand its activities similarly as innovations are disseminated in any productive area. Moreover, it is necessary for ensuring that the dissemination of innovations process eliminates ineffective entities from the given area or, as appropriate, that they are forced to switch to effective forms of activities in the area of services that enable the acquisition, preservation, or application of human capital (as in any well-functioning competitive environment. In case all or most entities are forced to operate effectively, where such terms comprises the reduction of the material intensity of inputs, involvement of other people, utilization of innovations, it is clear that the growth of the given community will meet the characteristics of smart, sustainable, and inclusive growth.

We must emphasize that, in addition to the traditional roles, the transferred price also has other roles that are not ensured by "normal” price. We have already discussed these roles, so in short:

1. Investment (credit) role: Each person has access to productive services, irrespectively of whether he/she does/does not have sufficient funds to pay for them;

2. Solidary-insurance role: More successful customers of the productive services providers pay more than the less successful ones (those, who fail, do not pay anything). This concerns certain solidarity of less and more successful (unsuccessful) customers, a method of preventing / diversifying the risk borne by the provider of educational services. However, such risk may be transferred to another entity through the capital market.

[8] As an example of such short-term profits with negative effects, we may refer to mortgage loan financing during the first decade of the 21st century in the US, where providers of such loans were – in terms of their short-term returns and profits – interested in providing as many loans as  possible, even to people unable to repay such loans. This subsequently led to the mortgage loan crisis emerging and long-term negative effects.

[9] It is necessary to emphasize that the problems associated with information asymmetry and adverse selection may be mitigated; however, not completely eliminated. These problems arise in respect of most human interactions, because individual participants do not have the same information in the vast majority of such interactions and to achieve the same level of information is too costly or even impossible. See e.g. Bowles (2004) for details. On the other hand, we are convinced that increasing human capabilities will make it possible to find solutions to the given problems, i.e. their effects will decrease.

[10] Naturally, we assume that the productive services providers and their customers also consider other information, in addition to the feedback.

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