$20 bills and campaign finance reform

An interesting look at campaign financing reform from Slate.com:

Auctioning off $20 bills….

One of my favorite classroom tricks is to auction off a $20 bill. I explain in advance that the $20 goes to the top bidder, but the top two bidders have to pay whtatever they bid. That way, if at least two students bid at least $10, I come out ahead.

In fact, it's far better than that. As soon as two students are rash enough to enter the bidding, I'm almost guaranteed an astronomical profit. Once Mickey bids a nickel and Minnie bids a dime, both are trapped: There's never a right time to drop out of the auction. If Mickey quits now, he loses his nickel, but by staying in he can quite reasonably bid a quarter for a $20 bill. Minnie, of course, raises her bid to half a dollar. After a few rounds, Mickey has bid $9 and Minnie goes to $10. Mickey can't quit without throwing away $9; instead he takes the far more sensible route of bidding $11 to get $20. Now my profit is in the bag.

But that's only the beginning. After a few more rounds, Minnie bids $18 and Mickey bids $19. Now Minnie can either bid $20 to get $20 or drop out and pay $18 for nothing; she bids $20. At this point, poor Mickey can either bid $21 to get $20 (accepting a $1 loss) or drop out and pay $19 for nothing; he opts for the lesser of two evils and bids $21. Similar reasoning leads Minnie to bid $22. The spiral stops escalating only when one or the other runs out of money or exhausts my willingness to extend credit. If my students were sufficiently wealthy (and sufficiently shortsighted to enter the auction in the first place), I could earn a lifetime's income in a 50 minute class period.

My auction game is a crude but instructive metaphor for political campaign spending. It might even be a reasonably accurate metaphor if we lived in a world where the biggest spender always wins. In any contested election, candidates would continue to spend until they had exhausted all their own and their supporters' resources. Foreseeing that outcome, no politician would ever contest an election. The first candidate to file would always win by default.

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