Thursday, May 2, 2019

Anja Shortland's "Kidnap: Inside the Ransom Business"

Anja Shortland is a Reader in Political Economy at King's College London. She has worked as an academic economist at Leicester and Brunel Universities, rising to fame for her work on the economics of Somali piracy. She now studies private governance in the world's trickiest markets: hostages, fine art, and antiquities- and how people live, trade, and invest in complex and hostile territories.

Shortland applied the “Page 99 Test” to her new book, Kidnap: Inside the Ransom Business, and reported the following:
The fundamental question in Kidnap: Inside the Ransom Business is: “How do you successfully trade with people you cannot trust and when the state cannot help you if they cheat?”

Ransoming hostages from foreign criminal, rebel, or terrorist organisations is one such tricky trade. What compels kidnappers to release hostages (i.e. potential future witnesses) after receiving the ransom? The answer is that there are robust procedures to ensure it is in the kidnappers’ self-interest to keep their promise. The book focuses on the role of special risk insurers at Lloyd’s of London. These have created and maintain a system to resolve hostage crises by negotiation that underpins much of global trade and foreign direct investment.

However, both for kidnap insurers and their customers, prevention is better than cure. If you know who poses the threat, can you avoid kidnapping by paying protection money? Chapter 5 analyses how firms operating in lawless or rebel territory buy security services from extra-legal organisations. How does a legal enterprise keep its powerful, violent “protector” from turning poacher? You must design a contract that ensures it’s in the gang’s own best interest to provide the promised service – but without upsetting your shareholders by making “corrupt” deals.

One option is to hire a private military security company (PMSC) to make and enforce the contract with problematic local powerbrokers. Page 99 explains why. The PMSC uses a mixture of local guards (hired from the gang controlling the territory) and foreign mercenaries. Effectively, the local guards become the hostages of the PMSC: assuring the foreign firm of the local gang’s good intentions:
Willingness to volunteer a hostage is a classic economic signal to help the receiver of a message distinguish the honest from a dishonest sender. If a compound guarded by both foreign and local private security guards is attacked, it is inevitable that the local guards will suffer heavy losses. They can get shot by either side. This implicit threat may suffice to make the relational contract self-enforcing, especially if the protector volunteers a close relative to command the guards.” Moreover, outsourcing the management of relationships with the local mafia or rebel outfit insulates the company from criticism: “If the press picks up a problem, the company is not at fault. PMSCs can be replaced when their reputation becomes toxic.
Page 99 therefore provides an excellent illustration of a successful contracting strategy in the economic underworld. Thanks to clever contract design most kidnaps are prevented. The remainder of the book is devoted to hostage crisis resolutions; explaining the amazing statistic that 97.5% of insured hostages come home. So, expect many more examples of ingenious contract design ensuring that there is honor among thieves (kidnappers) after all!
Learn more about Kidnap: Inside the Ransom Business at the Oxford University Press website.

--Marshal Zeringue