Wednesday, December 03, 2003

It’s My Baby and I’ll Sell If I Want To

I’ve been a long-time proponent of allowing a market in baby-selling -- or more accurately, the sale of parental rights -- as an alternative to the current adoption system. Under the current system, mothers are allowed to give their parental rights away for free, but they are not allowed to sell them for any price above zero. Like any price ceiling, this prohibition creates a shortage: too many willing adoptive parents and too few available babies. Letting the price rise to a market-clearing level would increase the number of babies available, by inducing more women to carry babies to term instead of aborting them, and also by inducing some “marginal” parents (i.e., parents who are just barely willing to keep a baby instead of giving it up for adoption) to opt for paid adoption instead. The result would be more satisfied adoptive parents, better cared for children, and wealthier birth mothers. For the complete case in favor of baby-selling, read this excellent article by Don Boudreaux.

However, a potential problem with the free market in adoptions recently occurred to me. It’s not a bad enough problem to overcome the arguments in favor (for reasons I’ll explain below), but it does present an interesting question about the power of markets to overcome bargaining problems. The problem arises from the fact that both birth mothers and birth fathers have a legal right to prevent an adoption. That means any potential buyer would need to buy off both parents before the sale could be complete. This situation creates a potential hold-out problem, since each of them would like as large a share of the gains from trade as possible. Fathers who under the current system have no interest in their offspring might, in a market system, suddenly take an interest for the sake of getting a share of the proceeds.

If both parents bargained hard enough, we could easily imagine some potential sales getting thwarted by the excessive demands of the mother and father. But set that difficulty aside, and assume there is some automatic division of the proceeds (arrived at through private negotiations or perhaps by fiat). Say the father automatically gets X% of the baby’s price. The problem is that the pregnant mother choosing between an abortion and carrying the baby to term would face a positive externality: she would bear the full cost of carrying the baby to term, but would only get (1-X)% of the benefits. At the margin, this would deter some pregnant women from having the baby at all, even if doing so would be efficient. If the full benefit is B, and the cost is C, this occurs whenever B > C > (1-X)B. As a result, an inefficiently small number of babies would be born and brought to market.

Now, presumably there’s a Coasean solution to this problem, as with any externality problem. When the mother chooses not to carry the baby to term, the father also loses whatever share of the payment he might have received. Realizing this, the father could offer the mother some inducement, presumably a larger share of the baby’s price, to induce her to give birth after all. The size of the inducement would be a function of the difference between the costs (C) and the benefits (B); the larger the difference, the greater would be the necessary inducement. In the marginal case, when B is just barely larger than C, the father would have to offer the mother almost the entire price and accept a negligible payment for himself. The problem here, as with any Coasean solution, is that transaction costs may be too high. Reaching an agreement over the size of the necessary inducement could be a costly process, in some cases costly enough to overcome the net gains from the agreement itself. Thus, while bargaining between the mother and father could reduce the size of the problem, it could not eliminate it: the number of babies born and brought to market would still be inefficiently low.

I’m still cogitating about this issue, so there may be some market solution that I haven’t considered. In any case, even if this potential problem is real, it’s hard to imagine that the result would be worse than the status quo, where the price that a mother legally can be paid is held down to zero (or actually, to the amount needed to pay for medical expenses and the like). Even if the price paid to the mother on the free market were not as high as it would need to be to induce all desirable births, it would still be higher than the price in the current system.

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