Hold Outs and Free Riders.

When I was in law school, my real property professor was an economist as well as a lawyer, and he often analyzed legal issues in economic terms. I remember during one class he discussed a classic problem from economics: the free rider and holdout problems. I believe that this was discussed in a session about eminent domain, and the valuation of properties taken by the government. In any event, with admissions, tuition assistance, and other economic issues on my mind during these recent days, I thought it important to review these concepts and indicate how they can wreak havoc at Kadima.

Back to law school. The professor discussed how whenever there is a group of people purchasing something, or being sold something, and there is a deadline, there is always an economic incentive for some of them to become "free riders" or "hold outs."

A free rider situation occurs when a group of people need to purchase something and not everyone wants to pay. Suppose a group of people need to pay for a bus, to get home from the beach. Assume that everyone needs to get home. The bus costs $500, and there are ten people. If everyone pays $50 then everyone can get home. However, one of the people might say, "well, the other nine people really want to get home, so I don't need to pay anything, since others will step up and pay and I know that they won't leave me here." What happens in this situation? One person really wants to get home, so he pays the extra $10 for the person who becomes the a "free rider." The free rider says, "look, they're not going to leave me here--that would be against community values--so maybe I won't pay anything, or I will pay less and have everyone else make up the difference." My professor said that the economic incentives make being a free rider very attractive, so one could argue that you need rules and regulations to overcome the market incentive.

A holdout situation occurs when a party tries to "hold out" to get a better price from someone else at the expense of others similarly situated. Suppose there are ten property lots and a developer wants to build a new hospital that the town desperately needs, but he needs to buy all 10 lots or he can't build the hospital. He offers the great price for each lot, which is $100,000. Nine of the people agree to sell their properties, but the tenth becomes a "holdout." He knows that if he doesn't sell, the buyer can't develop the hospital. So he demands $500,000 for his lot. Because this is not economical for the buyer, the project collapses, and the buyer sells the other lots. The hospital is never built, and the community is worse off, and property values for everyone decline. Again, if the government can come in and take the property (compensating the owner), the hold out problem is eliminated.

What does any of this have to do with Kadima or private school? Lots. We often face similar issues with regard to tuition, deadlines, and financial aid. Some people choose not to submit their contracts or aid applications in the hopes that they will become "hold outs". They hope that Kadima will be so desperate for the student that they can cut a deal in August that would be better than the price they'd get in March. Their belief is that Kadima would rather take $10,000 instead of full price, because $10,000 is better than nothing, and by waiting until August, they can put more pressure on the school.

Others become "freeriders" in that they don't make a meaningful gift to the school (and "meaningful" means whatever is truly meaningful to the family, based upon the family's financial situation) because they assume everyone else will. Even though we constantly point out that our tuition does not pay all of the costs of the education, many people don't participate in fundraising because, well, someone else will pay the extra costs. Or so they believe.

Holdouts and freeriders are inherent in any economic situation. However, we are working hard at Kadima to ameliorate their negative effect. Not only do these situations hurt us economically, but they tear apart the social fabric of the community. Those that are good citizens and who are not holdouts or freeriders resent those that are, and then they decide either to leave the institution or try to become holdouts and freeriders themselves, and then, well, there's chaos. Moreover, the example it sets for our students--cut every corner, don't follow the rules--are contrary to the Jewish values we hold dear and promote at our school.

So what to do?

We can't change laws of economics, but we can "institute rules and regulations" that try to use them to our advantage. And we are doing just that. We are setting and sticking to our deadlines, even if, in the short term, it means additional pain for the school. If people know that they will pay a price for being a freerider or a holdout, and that there is no benefit to doing so, they are less likely to try.

We can, and have, created transparency in our processes and procedures so everyone knows how we do business. We can manage our affairs competently, judiciously, and wisely, all in tuned with a Mission to promote Jewish education. Ultimately, we can provide an educational product that is so spectacular that everyone wants it for their children.

None of this is easy. But we are working on it. It requires time, hard work, and the commitment to change.

We will succeed at it. And while some may lament the loss of a "special deal", the institution and the community will be the better for it.