Credible Threats and Murdering Children

While looking at my loan repayment plan today, I started thinking about the fairy tale of the Pied Piper.

For anyone who isn't familiar with the story, back once upon a time there was a town infested with rats. The townpeople hired an expert rat-catcher to lure the vermin out of town with his magic flute. The rat-catcher did his job, but when it came time for the town to pay him, they reneged on their payment. To retaliate, the Pied Piper came back, and used his flute to lure the children of the town away and into a cave, and one can only assume he ate them all.

The moral of the story is if you don't pay the man, he'll come and take your babies from you. The fault is almost always placed on the greedy, cheating villagers and rarely on the child-killing psychopath, but my inner economists sometimes wants to side with the town.

First, let's take this incident in isolation. Granted, defaulting on promised payments can have deleterious effects on long term growth (just ask any country that's had problems repaying loans), the town could have assumed that it would be a long time before they would have another rat problem, long enough that their bad credit history with rat-catchers would have been buried with age. That's not so hard to believe, as credit agencies back in once upon a time were probably rubbish at bookkeeping, and professionals would have been starved for work anyway.

Second, no one could have predicted that the duped rat-catcher would make good on his threats. It doesn't make rational, economic sense! In game theory we learn to analyze if threats are credible. In this case, the Piper threatens to kill the town's children if he isn't paid, and that's a textbook example of a non-credible threat. If the town doesn't pay, then the Piper is left with two options: kill the kids or don't. Neither of those options will get him his money back, so at that point he would have no reason to kill the kids. Really if he were a better hostile negotiator, he would have threaten to just kidnap the kids and hold them ransom. That is a much more credible threat, and would probably have gotten him paid in the first place.

Instead the Pied Piper makes an non-credible threat, and the town rightfully called his bluff. I fully support their decision; it was just unfortunate that the Pied Piper turned out to be an irrational, child-murdering agent. Economically, the town's logic was sound, but I'll be repaying my student loans in case my creditors turn out to be as irrationally homicidal as the Pied Piper.