At 06:42 PM 5/16/96 -0700, Wei Dai wrote:
I'll just give one problem: the principal-agent problem. How do owners of the company make sure the managers operate the company in their best interest?
Actually looting of companies happens a lot right now today, and very seldom leads to criminal charges. Twice I have lost a job because the company I worked for went under, apparently due to looting.
Solution: reputation. If the managers don't do the right things, the owners arrange so that the managers lose reputation and won't get hired in the future. Unfortunately the science of reputation is not so advanced that we know this will actually work.
At present venture capitalists seem to rely on the sniff-their-arses method. They talk to people and try and get a feel as to whether they are planning a robbery. This method is obviously likely to be less effectual as businesses move to the net. This problem is probably the major reason why Net startups are physically located in Silicon valley, rather than world wide or nation wide. Of course the problem is that if the venture capitalists can find them to sniff their arses, the bad boys can also find them to shake them down. In some businesses we can solve this problem by cryptographic control mechanisms, such as open books banking. In others, such as net startups, I see no solution other than increased reliance on personal individual capital. Athenian capitalism worked largely on personal capital. Because of their terrible arithmetic system, bookkeeping was really bad, and in consequence stock investments tended to go sour. Socrates lost a bundle in this fashion, which may explain his lack of enthusiasm for capitalists.
Solution: smart contracts. This is Nick Szabo's idea of building contractual obligations into cryptographic protocols so that the parties have no choice but to fullfil them. But again we don't know whether this will actually work for this problem.
It will work for many particular cases of this problem. --------------------------------------------------------------------- | We have the right to defend ourselves | http://www.jim.com/jamesd/ and our property, because of the kind | of animals that we are. True law | James A. Donald derives from this right, not from the | arbitrary power of the state. | jamesd@echeque.com