Last night I saw the excellent Butch Cassidy and the Sundance Kid for the first time. There’s a lot of economics in that movie, with several instances of the “hold-up problem”.

For instance, when Butch Cassidy finds out the expensive lengths the train company is going to in order to stop he and Sundance from robbing them, he identifies and laments a pareto improving road not taking.:

“A set-up like that costs more than we ever took…If he’d just pay me what he’s spending to make me stop robbing him, I’d stop robbing him.”

This is a lesson in the limitations of the Coase theorem, especially when one party has shows a willingness to break the law. Reputation and trust matter for effective contracts.

Later Butch wants, and in fact tries, to make a bargain with the government, offering to fight in the Spanish-American war and stop his criminal ways if all their past crimes will be forgiven. Again, the reputation and the commitment problem prevent a pareto improving outcome.

In the literature on the hold-up problem, vertical integration is one proposed solution, which is exactly what Butch and Sundance attempt. They get a job for a company as security, stopping robbers like themselves. This solution fails because of their preferences; they don’t like to kill people. Security requires more violence than robbery because when you’re a robber you’re can make credible threats that actually prevent violence (“don’t move or I’ll shoot!”), and so you can avoid actually killing people. When you’re on the security side, once someone has decided to rob you they have already decided that the level of violence you are implicitly threatening is not enough to stop them, and so you have to use more violence than they were expecting to stop them.

To avoid being arrested Butch and Sundance move to Bolivia, and this is where they began working as security. The irony is that had they been working as security in the United States, their reputations as excellent gunmen would potentially have made their threats successful so they wouldn’t have had to use violence to stop robbers.