Ownership and Incentive

March Madness always gets me thinking about my days as a booze-hungry UConn Husky in barren Storrs, Connecticut.  I’m not sure what the situation is like these days, but the bar scene in my day consisted of three individual bars: Ted’s, Husky’s, and the Civic Pub.  Ted’s was a small shot and beer joint that catered primarily to scruffy, classic-rock chanting, head-banger types.  Husky’s and the Pub, on the other hand, competed for the dance floor-obsessed and typically had to deal with larger, late night crowds. I frequented all the bars depending on my mood, but I want to focus on comparing the latter two.

I always preferred Husky’s to the Pub.  I wasn’t exactly sure why early on, but as the months and semesters went by I began to notice how hard the bartenders worked at Husky’s.  Considering how many people would crowd the bar on weekends, it was remarkably easy to get drinks.  The wait time was minimal and the speed at which the bartenders moved was unmatched at the Pub.   This is something I’ve actually come to appreciate more since graduating as I don’t think I’ve come across better bartenders in my life – even after living in NYC for three years.

So what accounts for this difference in service?  It’s certainly not that they were shooting for better tips.  College students generally tip the same regardless of how hard their bartender works.  While incredibly slow service might lead to no tip at all, even the quickest bartender won’t get more than a couple of dollars per drink.  The answer, it turns out, is pretty simple: The bartenders at Husky’s were its owners.  Thus, they had a much larger stake in how many drinks got poured night in and night out.  The more drinks were sold, the more money each bartender took home as part owner of the bar.  This is certainly the case with non-equity bartenders too, but the reward is obviously much less.  They are less incentivized to bust their tails since all they will get are a few dollars more in tips.

This simple example is a microcosm of a larger reality.  I’m no economist, but it seems like the quality of any product or service depends, in large part, on the degree to which those who control it are incentivized.  Private ownership provides that incentive.  Civic Pub was privately owned as well, but because its bartenders didn’t have any equity stake in the establishment, their incentive to maximize the amount of drinks sold was much less potent than the incentive possessed by the bartenders at Husky’s.

Economic policy is ridiculously complicated and I am in no position to comment on it.  But I do think that at its core is a very simple principle: people are self-interested.  The quality of our work product depends on the degree to which we are incentivized.  The most powerful incentive in our society is a monetary one.  Ownership is thus the ultimate incentive.  Any successful economic policy must recognize this fundamental truth.