The Economics of Eritrean Kidnapping

I listened to a fascinating This American Life while driving back from Chicago entitled "This Call May be Recorded to Save Your Life". It tells the (true) story of a journalist who gets pulled into helping to rescue an extensive network of kidnapped Eritrean refugees. I recommend giving the episode a listen before reading the rest of the post.

But, for those of you short on time, I'll give a brief summary here. The journalist, Meron Estefanos, is put in contact with the kidnapped individuals via cell phone. Talking to them, she is told stories about how they are being tortured and will be killed unless someone can pay $20000 (each). She begins talking to the hostages daily, and their plight slowly consumes her life. She ultimately speaks to hundreds of captives and learns that there is an industry built around ransoming refugees. Meron tries to raise awareness of the issue with her radio program, but finds the NGOs and governments who could help are ineffective. And as if raising the hundreds of thousands of dollars necessary to free the captives isn't enough, the nature of the kidnappings make the issue even more complex. How can she be sure that she isn't being lied to? Allegedly, paying up will get the captives freed from where they are being held in the Sinai Desert into Israel, but how does she know the kidnappers will play fair? And of course, paying up only encourages the kidnappers to commit more kidnapping. Ultimately, Meron does get many hostages free by raising money and working with the families involved, but to this day she is still actively working to free an ever increasing number of hostages.

This story was fascinating to me not just because of the human elements, but also because of all the great economics involved. First of all, you have some serious asymmetrical information problems at play. In his famous "Market for Lemons" paper, economist George Akerlof uses used car sales to illustrate how uncertainty over the quality of a product can drive down an entire market. Consumers of used cars have a hard time knowing if the car they're buying will be a "lemon", one that will break down quickly. Thus, they aren't willing to pay very much for a car. This drives out the people with good used cars to sell, leaving a greater proportion of lemons on the market. This further drives down the price consumers are willing to pay, driving out more good cars, and so on and so on until all you have is a market where the product is cheap and the quality highly suspect. The root problem is asymmetric information - the car owner knows a lot about the quality of the car while the car buyer knows very little.

Asymmetric information also plays a key role in Meron's kidnapping dilemma. How are the hostages being treated? Meron can't be sure all the tales of torture and threatening are true - what if the hostages are being forced to tell her lies, or it's all part of some hoax? When she pays the money, will the hostages be freed? The kidnappers are trying to create a market for the people they've captured, but information asymmetry makes it a tough market to operate efficiently. Sure enough, the $20,000 price tag gets dropped to $5,000 at one point, and even when Meron pays the hostages aren't released at first, although the kidnappers attempt to fool her into thinking they are. Just as in any market for lemons, shady dealers dominate the market while quality and price drop. Understandably, all these issues make it difficult for Meron to raise money.

The kidnapping tale is also a great illustration of incentives at work. The only reason the thugs Meron deals with engage in kidnapping is to get rich, but they only get rich if Meron gets them ransoms. One of the hostages Meron frees relates how the kidnappers' moods would rise and fall with Meron's reports on her progress in raising funds. Meron is not only the hostages' main source of hope, but also the kidnappers'. Since she's had success freeing dozens of hostages, it's not surprising that Meron is the first person the kidnappers contact when they capture a new group.

This leads to an illustration of another economic principle: collective action problems. If all of Eritrea could sit down and create a binding pact for how to deal with these kidnappers, they'd probably agree to just stop all payments altogether and send in some guys with guns to kill the criminals. Either way, would-be kidnappers would realize there is only danger and no reward in kidnapping. But of course, all of Eritrea has not created a binding pact for how to deal with kidnappers. Instead, each family is more or less on its own. The families of those who are kidnapped are concerned with saving their loved ones. They are less worried about how their payments will create incentives that will lead to others being kidnapped. Ideally, Eritrea would have a security force that would stop these things, but it's not a stable country at the moment. This is also a piece of evidence against the libertarian theory that markets will overcome collective action problems. Theoretically, instead of paying thousands of dollars to these kidnappers, the families should pool their money to hire some mercenaries. Of course, it's difficult and costly for the families to cooperate, so nothing gets done. Notably, the kidnappers made sure to get Meron emotionally attached to a few of the hostages in particular so she would become compromised by the collective action failure. As an independent observer, Meron was hesitant about perpetuating the kidnapping by paying into the system. But as she came to sympathize with the hostages she spoke to, she became determined to raise the money to free them. Apparently, Meron now has formed a semi-official organization for freeing the hostages. She tries to pressure governments into action, but I believe the money is still flowing. Maybe Meron could organize the hiring of some mercenaries?

As long as I'm typing up these economics posts, I'll write sometime soon about the mystery of why Dairy Queen doesn't raise its prices on hot days.