The Answer Is Transaction Costs

Second Place Is The First Loser: Strategy Over Speed

• Michael Munger

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The ancient tradition of Il Palio in Siena showcases a complex system of strategic corruption, neighborhood rivalries, and high-stakes horse racing that has endured for centuries. This 90-second race around Siena's central piazza involves extensive bribery, intense negotiations, and centuries-old vendettas that make speed secondary to political maneuvering.

• Horse assignments determined by lottery prevent wealthy neighborhoods from buying fastest horses but create opportunities for strategic corruption
• Jockeys accept bribes up to €80,000 to impede rivals or assist allies, with reputation determining future employment
• The "rincorsa" (starter horse) wields extraordinary power in determining when the race begins
• Enforcement of bribe agreements relies on reputation, trust, and fear rather than formal contracts
• Coming in second place is considered worse than finishing last, leading to public ridicule that can last generations
• Neighborhood identities and rivalries date back to medieval times, with memories of betrayals lasting decades

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Speaker 1:

This is Mike Munger, the knower of important things from Duke University this week horse racing, nerbi DE BUE and transaction costs in Siena's Il Palio Coming up this Saturday. A new twedge. This week's letter book it a week and more Straight out of Creedmoor. This is Tidy C. I thought they'd talk about a system where there were no transaction costs, but it's an imaginary system. There always are transaction costs when it is costly to transact, institutions matter and it is costly to transact.

Speaker 1:

Il Palio takes place in Siena, italy, every year on July 2nd and August 16th. Horse racing in public streets in Siena dates back to 1232. It was established in more or less its modern form in 1659, and since 1701 it has been formal. 1659, and since 1701 it has been formal, with that race being held twice annually, on July 2nd and August 16th, in the large piazza in the center of the city. The term Palio refers to the silk banner that's awarded to the winner of the race. In Italy, any Palio is a traditional athletic contest between local neighborhoods or districts, and Il Palio, the Palio, takes place in a contest between the 17 contrade or neighborhoods or administrative districts, and they really are districts. They each have it's almost like they're separate little towns, many of which hate each other, in the larger city of Siena. So the Palio is famous for its speed, intensity, and you often see bodies flying. As far as I can tell, no human jockey has ever died. The race is quite dangerous for horses 48 had to be put down or just died of their injuries between 1970 and 2007. Now you can say that there's a whole lot of races and the fatality rate is not that high, but still that's pretty dangerous.

Speaker 1:

Let me start with the process by which the race itself takes place. To begin with, you have to decide which of the contrade are going to be racing in a particular year, a particular date July 2nd or August 16th. There are 17 contrade. Only 10 are allowed to race in any given polio, except in special circumstances. The way that that works is seven of those that were excluded in the previous race automatically get in, and then three of the remaining 10 that already raced last time are chosen by lot. So each time, the seven that were not included get to race the following time, and so you get quite a bit of turnover. Among the 10 that actually are racing in any given Palio.

Speaker 1:

You have to have a selection of horses Now, for quite a long time there was a concern that knowing which horse in advance was going to race for which of the contrade might mean that you would sneak over a month before and maybe poison the main horse of your enemy, your rival. Or if you had a really great horse, it would give you an advantage. And, it's interesting, they have a system called the tratta T-R-A-T-T-A, which is the assignment of horses by lottery. The horses are chosen by drawing their names effectively out of a hat. Now there's 30 horses that are considered. They have to be mixed, breed, age 5 to 15. They have to be not very fast, they can't be slow, they can't be fragile, but they can't be super fast either, and so the point is to try to get 10 horses that are more or less the same, and of course what that does is put all the emphasis on what we might call strategy and of course this is Italy. So strategy includes the payment of favors and, in many cases, outright bribes, and it is understood at El Palio that most of the time, at least dealing with jockeys and owners, the idea of bribery or paying someone to get an outcome that you want is perfectly all right are ultimately selected, and then those 10 are randomly assigned to the 10 contrata that are participating in that edition of Il Palio.

Speaker 1:

On the morning of the trotta the chosen 10 horses are lined up and each contrata's name is drawn at random from an urn. And the reason that the trotter is so important is that if a large, powerful contrada gets a good horse, they'll try to win. If it gets a bad horse, then they're in the position of accepting bribes to try to impede or assist whoever will pay the most. So I have an enemy, you get a bad horse, I will pay you to prevent my enemy from being able to pass you. You'll go slow in order to have my enemy go even slower and as a result, that will help me win slower and as a result, that will help me win.

Speaker 1:

Only after knowing which horse each of the Contrada will have will they choose the jockeys. And the jockeys I've seen them compared to mercenaries or, worse, prostitutes. The jockeys have, by design, have zero loyalty to the Contrada, so each of these neighborhoods is just hiring someone. Some of the jockeys are quite famous and there's kind of an honor system that they're going to try. But the negotiations with each of the contrada can be pretty complicated. If the horses could be privately hired or purchased for the race, then whichever ones are the wealthiest would get the fastest, best trained. Having this lottery system means that it's more or less even, but it also almost requires this advanced strategizing and bribery, because that's the only way that you can win. So, since you can't choose your own horse, everything depends on the jockey's ability, the alliances that the contrata have and tactics during the race.

Speaker 1:

And let's be clear, the race lasts 90 seconds. It's just three laps around this open air piazza. So it's as much about political maneuvering as raw speed. There is no reason to think that the fastest horse will win because in many cases there may be two or three allies of whoever has decided they're going to win. And if you have two or three allies you can make it very difficult for a fast horse to get through these very narrow lanes.

Speaker 1:

There's one example, famously in 1686, and it tells you something. We have pretty old baseball records in the United States and we think about old times, but famously in 1686, some horses were being assigned to the trotter. There was a confrontation between the snail and the tortoise. Each of the 17 contrada have names, so snail and tortoise were angry at each other. It escalated to the point that the city authorities barred both of the neighborhoods from even participating in the race and put fines on both of them. Finally, the Catholic cardinal said that they could participate but required that the members enter the piazza unarmed. Now this is 1686. It's not like they had concealed carry. We're talking about swords, spears, bow and arrow, long muskets. The fact that they had that requirement in this case makes you wonder how things usually worked. And that was during the Trada. That was just in deciding who got what horses. So it's organized around the 17 Contrade, and these date back to medieval neighborhood battalions where the city-state would require each of the neighborhoods to raise a battalion for defense.

Speaker 1:

They have their own chapel, fountain, museum, their mottos, rivalries, long histories of who we hate, who we like, and in some cases they have allies. And it is easy for some of those alliances to turn into hatreds, and the memories of those betrayals can last dozens of years, decades. In order to win, you have to start preparing for the polio long before the race. The Contrade cultivate alliances. There's a lot of negotiations and offers and discussions. Sometimes they'll pay jockeys in advance. That is no matter who you ride for you need to help us. And obviously that deal would continue even if they get hired by someone. And if that seems unethical, it is because I'm agreeing to ride for someone, knowing already that I'm actually working for someone else. But it's not illegal. It doesn't violate the formal rules of Il Palio because that's just the way that things go.

Speaker 1:

So often in the buildup to the race, the Contrade will collect money to hire a jockey but bribe other jockeys, and the amounts that we're talking about could be 250,000 euros, up to a million or more euros. So this is a significant amount of money. This is enough. If a jockey gets paid that much, that's obviously enough for them to live for an entire year, and remember there's two of these a year. So if you're a top jockey and you're able to get in a position of leverage, that's all the work you have to do. You have to practice if you're going to continue to ride. But the enormous amounts of money Jockeys or contrade that draw a slower horse are just going to be paid to impede rivals and you can make a very significant amount of money doing something like that. So it may happen right towards the beginning of the race.

Speaker 1:

So famously, there was a jockey whose nickname was Sorba in 1770. He trailed behind quite a bit and then he hid among the spectators and waited for everyone to come around. And that's only about 30 seconds. So all you have to do is wait 30. If you can hide for 30 seconds, you can jump out of the crowd, pretend you're in the lead. He did in 1770, cross the finish line first, even though actually he had been lapped, he had hidden, and it worked because there was enough dust that people claimed he had done that. But the people who were—he hid among his own contrada and that allowed him—they said nope, never saw him, didn't happen. And so he won. Now he tried that again in 1775. This time some judges had been watching, they had been warned, and so they overturned that and it didn't work. But that's the sort of thing that you might expect to happen. That is clearly outside the rules, but the rules are whatever you can get away with.

Speaker 1:

There was an incident in 1896 from a jockey nicknamed Anzanello. He was from Merlo, a city outside of Siena, but he rode in 17 different Palios and he won twice, once for She-Wolf and once for Tortoise. In 1896, he was riding for Tower. He approached the third curve, the third turn, which is difficult to get around, and he stopped, allowed the rival from Goose to take over, and this was so obviously a throwing of the race. That is, he had agreed that he would not win and he had been paid by Goose to allow them to win that he immediately ran and surrendered himself to the Carabinieri. He tried to turn himself in, but what really was happening was he was afraid of being killed. He wanted the Carabinieri, the police, to protect him from being killed, and that was beyond the usual kind of rules. If you kind of shade it makes me think of the Black Sox scandal If you make some mistakes and you don't win and people aren't sure, okay. But he did it so blatantly and obviously that it makes you wonder what it was, why he was doing that. But that may be the single most famous example of accepting a bribe. He was banned for two years from racing and later he went and hid out in a convent and then went to live in Chianti. So he must have been paid a lot, but it is hard to imagine that level of betrayal.

Speaker 1:

One of the things that the jockeys often do is to beat each other with the nerbi bue, which is a there's no other way to put this it is a ox penis. It is a long, stretched out, dried, turned into leather ox penis penis and it can be 80 centimeters long. It's used as a whip and it is extremely light. And this may be the most Italian thing I've ever heard. There's these men riding horses in a crowded square. They're wearing colorful silk costumes and beating the heck out of each other with giant ox penises. And that happens twice a year in Siena and it's extremely important. It's taken deadly seriously. People use these nerbi on each other, on their own horse and on opponents' horses, and it's interesting.

Speaker 1:

There are rules, but the rules are not clear. You're allowed to hit your own horse, you're allowed to hit other horses, but not in the eyes, not in the face. It's not clear exactly what that rule is. And you're allowed to hit your opponent, but it's on the arm, on the leg. You can push them, but you can't hit them in the face or eyes either and you can be disqualified, but again, the rules are not exactly clear. It's more like, as they said in Pirates of the Caribbean guidelines. The penalties for misusing your NERBO are fines, suspensions, and the worst was probably in 1992, when the Panther neighborhood jockey was suspended for five races. So two and a half years for excessive nerbing against the Eagles. He's won 14. And you think about it, that really is pretty impressive that this is a race that is held twice a year to have won 14.

Speaker 1:

And remember, it's not about fastest horse and it's not about who's the best jockey. You have to be able to manipulate the process by trading off bribes to win and getting bribes to other people to help you win. In a way, this seems to me a bit like professional wrestling, where the outcome is almost determined in advance. But it also is something like the Super Bowl, where sometimes it might be boring but the outcome is not determined in advance, only times 10. So if you were to imagine, twice a year in the United States we had a giant professional wrestling match that people cared as much about the Super Bowl only even more than you, have some idea what the Palio is like in Siena.

Speaker 1:

Now there's another aspect of this that, to an outsider, seems designed to create opportunities for bribery and corruption. The race starts remember there's 10, and the order in which they will line up is determined by a lottery. And they're very careful. They have a machine that gives you the order in which the horses will line up, and it's not great to be the first horse, because then you're right up against the wall. Then second, third, fourth, fifth and so on through ninth. Those are okay.

Speaker 1:

The last horse is the rincorsa, or the starter horse, and what rincorsa means in Italian is something like run in or run up, and that 10th horse stays outside of the roped-in area. The race starts when the rincorsa, the starter horse, comes into the starting area, and so what that means is that the rincorsa has a great opportunity to accept bribes, because the jockey of the run-up horse can look and see, because the horses are milling around, they're jumping, they're biting each other. Sometimes they get turned around, so you get to decide when to start the race. If you start the race when the horse that you've been paid to impede is facing the wrong direction, that's a huge advantage. So whoever paid you then is going to have several meters lead. By the time the person that they don't like their enemy gets his horse turned around, and there's this constant milling around. So the race begins only when the Recorsa gallops forward into the starting area. Plus, then he gets a running start. The starter then drops the front rope at the exact moment that the run-up horse comes into the starting area. That means that the jockey of the rincorsa horse can delay entry for minutes, and in some cases more than minutes, and give more time for back-channel deal-making. So if the horses are milling around too much, the starter will tell them all to go out. And you can see the people are crowding around the Recorsa jockey making bids, just openly saying I'll pay you 10,000 euros, I'll pay you 50,000 euros. What they're trying to do is get the Recorsa jockey to advantage them and to harm their rival.

Speaker 1:

Famously, in 1991, there was a kind of standoff. The Rincorsa jockey hesitated so long that it got dark and they had to delay the race until the next day. The Rincorsa jockey was from Seashell and he had clearly been paid off by Tortoise. Tortoise had paid off Seashell in order. And what's interesting is you don't know who's going to be the Rincorsa jockey, because the one through 10 is only chosen at the last minute. But you can make contingent offers. You can say if you are rincorsa, we will pay you this. And you can go to everyone and say if you are the rincorsa jockey, we will pay you 20,000, 30,000 euros, 70,000, 80,000 euros. Apparently there's actually examples of 70,000 or 80,000 euros being paid to the Rincorsa jockey to exercise his discretion about when to enter.

Speaker 1:

Well, what happened in 91 was the Rincorsa jockey, who was from Seashell, waited and waited, and the reason is that the people who had paid him off Tortoise couldn't get to the front because they were being impeded and blocked by the jockey from Snail. So the Snail jockey is blocking the tortoise jockey and as long as the tortoise jockey couldn't get a good start, the Rincorsa horse from Seashell wouldn't start the race and so it was a standoff. Snail would not allow the tortoise horse to make a clean start and so the seashell horse, the run-up horse, would not start the race. They ended up postponing the race until the next day and there were a lot of threats. But eventually they did get the race started and it turned out that tortoise did in fact win. It's hard to say because they had paid off the Rincorsa horse or not, but in any case it did work out.

Speaker 1:

Your discretion in the first minute of the race gets you that payoff of 70 or 80,000 euros and that money goes to the jockey. It doesn't go to the neighborhood, it just goes to the jockey. It doesn't go to the neighborhood, it just goes to the jockey, and so the jockeys here are in a position to make quite a bit of money. The downside is that if a jockey loses and of course most jockeys do lose, since the neighborhood only cares about winning they don't care if their jockey gets paid. They may beat the heck out of him. You might wonder.

Speaker 1:

These agreements are secured with bribes, and remember, there's people whispering to each other and they don't actually pay money right before the race. What they're saying is if you do this, I will pay you later or I will provide you with favors later, which raises the transaction cost question. Why would you trust them? Historically, the rincorsa is one of the most purchasable strategic positions. It's not always illegal to purchase, but it does make you wonder how can you enforce this agreement? And to give you an idea of the scale, recently there have been estimates that the winning Contrade has 2.5 million 3 million in US dollars, so more than 2 million euros, at stake, and you pay that if you win. These are contributions that are taken up from the people who live in the neighborhood. So this system of bribery is a kind of shadow economy that has its own rules and hierarchies and a lot of it operates on reputations.

Speaker 1:

So pre-race there's these private negotiations between the emissaries and the jockey, and sometimes they take place in safe houses because you don't want to be seen talking. If you're a jockey you don't want to be seen talking to the other side. But spies say, oh, I saw him walking over towards the other neighborhood and we need to watch him. The other neighborhood and we need to watch him. The most frantic bidding happens after the trotter, so after the horse assignment, in the few days between the horse assignment and the time when the race is going to be run and the jockeys are hired.

Speaker 1:

The form of payment could be cash in advance, but obviously if you give cash in advance you have no way of enforcing the actual act. A person could take the money and then do something else. On the other hand, if you promise the cash afterwards, then even if the person carries out the agreed upon impedance or does whatever you asked the jockey to do, then maybe he won't get paid. Does whatever you ask the jockey to do, then maybe he won't get paid. So both neighborhoods and jockeys have reputations and I'm reminded of the old joke about the US Senate. We see a US senator is honest if he stays bought. That is, if you give the senator a bribe, he actually does what he said he would do, because otherwise he won't get any more bribes in the future. And so this is a system that is based on reputation and repeat business and in a way it works surprisingly well, because maybe you'll give a partial amount before the race as a show of good faith and then you promise larger sums if the agreed outcome happens. And the nice thing about that is, if the agreed outcome happens, you are likely to pay because you're happy. They actually care about the outcome in a way that the jockey does not.

Speaker 1:

Finally, many of these payments take the form of jewelry, vacations, jobs for relatives, future protection in other races, so the exchange of favors rather than actual money. And the top jockeys all have a personal fixer, in effect a manager that handles all the logistics. And it's much harder to keep track of the manager, because then the jockey can say you know, I have no idea, I don't know what you're talking about. Never talk to those people and say you know, I have no idea, I don't know what you're talking about. Never talk to those people and he didn't. His manager took care of it for him.

Speaker 1:

Very rarely officials might be bribed, and the job of official is actually seen as being a pretty high honor. So for an official to violate the rules and put a thumb on the scale in this process from accepting bribes would be pretty unusual, because they'll lose their job. Deals are enforced by reputation and career survival. A jockey who once violates an agreement is not likely to be hired by any of the other contrade again, and the reason is that the jockey had no loyalty to any of the contrade in the first place. So they're looking for someone who honestly accepts bribes.

Speaker 1:

If I accept a bribe to harm the horse of the neighborhood I'm riding on not physically harmed, but prevent it from winning, that seems like a conflict of interest. You can't do that too often. If, on the other hand, I accept a bribe and it is in addition to I am going to ride for my neighborhood and maybe it's I'm going to hold back the horse of the enemy of the neighborhood that I'm riding for, that's just fine, that's great. It does seem like there's an opportunity for double dealing and multiple bribes, and that's true. A jockey may take payments from two rival neighborhoods, maybe one to help one of the contrada and then one to block yet a third. If he can fulfill both of those deals, he can get paid for both of the two bribes. If the deals conflict, he has to choose which one to honor and often it'll be the one with the bigger payout or the long-term strategic benefit, but it might be the one where he most cares about reputation.

Speaker 1:

So it's pretty common for bribes to be promised but not fully paid, especially if the desired outcome doesn't happen. Even but not fully paid, especially if the desired outcome doesn't happen. Even if the jockey tries, if the desired outcome doesn't happen, you're not going to get paid. That's why the jockeys often want some part of the payment to be made in advance. So this works without lawyers or contracts. We did an earlier episode with David Skarbek where the system is based on trust and fear. And the polio's bribe system is certainly also based on trust and fear, just like prison gangs. Trust because long-term relationships between jockeys and the contradict leaders are profitable, and fear because breaking your word can actually end your career and these are really high paying jobs. If you can ride over and over again as a jockey, you want to continue to have access to that, and so a one-time, even large payment is not worth compared to the present value of the stream of income you're going to get from riding as a jockey who is trusted to be honorably corrupt over five, ten more years.

Speaker 1:

So there's a number of examples of famous double crosses. A jockey named Siocio was riding for Caterpillar and that's the neighborhood, not the company was riding in 1790. And he had a very strong horse, but he clearly was holding the horse back and it raised suspicions of clandestine betting. And then, 1792, he used his whip to beat the horse of another neighborhood to prevent it from passing, in a way that was so aggressive that their own citizens attacked him until city guards finally intervened, promised the tower that if he got assigned to Goose he would hold up the Goose's horse until tower passed him and allow tower to win the race. Uh, he was assigned to Goose, and not only did he not hold up Goose, he rode the Goose horse so fast that he ended up winning and he had accepted some money in advance from the Tower neighborhood. So the people from Tower went to destroy his home, burn all of his clothes. They tried to exact revenge.

Speaker 1:

I think partly because he had accepted some money in advance. That just seems different. If you accept money in advance, you really are saying that you'll do it. On the other hand, he won the race and maybe it was worth it to him in the long run. But even the people from Goose, you'll notice, are not going to trust him because he made a promise and then reneged on it, and that means that even the people that you won for are not going to want to trust you in the future.

Speaker 1:

So the deals are often informal. Enforcement relies on social pressure. So the deals are often informal. Enforcement relies on social pressure. Jockeys who betray agreements risk blacklisting and they also may get violent retaliation and shunning. So many of them are not from Siena, but still they worry about their reputation, particularly the successful people. There are formal punishments, in addition, but a lot of the punishments are informal. So there's an underlying tension between strategy, loyalty and self-interest, which makes it very complicated to survive in this world.

Speaker 1:

One of the most famous and egregious recent scandals was in 2019, luigi Bruschelli, who has won 13 Palios the second most ever substituted microchips between two horses in the trotta. He tried to make them look like they were the kind of half-blood, not thoroughbred. He was trying to have thoroughbred horses, which is that they would not have been chosen, actually make it through the trotter, and then was hoping that, since he knew that these were really thoroughbreds, he was going to contract with the contrade that had one of these horses and that way it would help him win. This was discovered, and since you had to cut open the horse to get the microchip out, this was something beyond the mere kind of betrayal and corruption. He was found guilty of animal cruelty and was actually sentenced to four years in jail, which is remarkable. It was eventually reduced to a seven-month term, but still he was suspended. So Luigi Bruschelli is one of the most famous and now one of the most controversial of the jockeys, but it does tell you something about the extent to which people will do almost anything to win. The amounts of money and prestige are so large. One more thing about El Palio which is interesting.

Speaker 1:

I just find the institutions of this contest to be fascinating. Second place is the worst possible outcome, so coming in last is actually might be kind of cool. You might be the run-up horse and then, if you come in last, that's fine, because you got to be the kingmaker and decided who would win. What's really embarrassing is to come in second. No prize for second place, there's no silver medal. The only thing that matters is winning the silk banner. There's a humiliation factor for coming in second. The Italian saying is whoever comes in second is the first of the losers, and being first of the losers is not something that you want. So it's especially bitter if you come in second to a rival contrada, because the public ridicule for that can last for years. So some of the times the historical rivalries intensify that Now it might seem like that it'd be easy to avoid coming in second.

Speaker 1:

All you have to do is pull up. But if you're trying to win, you may come in second just because you were trying to win and remember winning is the most important thing. It's also chaotic. It's only three laps on a really tight, dangerous track, so you can pass or fall in seconds. If you're in third place and the second place horse falls or turns aside, you're likely to come in second without meaning to. A jockey may also have taken bribes to block a specific rival or to try to push the pace. You may be in second place and you're trying to hold back the third place horse because the first place horse paid you to do that. Well, that means you're going to come in second and your neighborhood's going to be upset. But the jockey had to do that in order to collect on the contract that he made to impede the horse that now is going to come in third, who otherwise might have won. So that gives you a sense of the kind of complexity of this.

Speaker 1:

Even if the win is gone, the contrada might prefer a strong showing over an obviously thrown race. Deliberately easing up is cowardice or dishonor. Pulling your horse back so as not to come in second might be even worse than coming in second and getting made fun of. But the belief is very real. Second place is remembered and mocked. Finishing sixth or seventh is quickly forgotten because it's assumed that you were participating in some scheme and you actually get some credit for helping the first place horse win.

Speaker 1:

It might seem like this is an excessive emphasis on not coming in second, but an example 1896, snail was leading the race up until the last curve when Tower surged past and claimed victory. Snail's collapse from leader to second was so devastating that one of the representatives of the neighborhood went into the stable and had an image of St Anthony which is that neighborhood's patron saint, and then threw it down a well because St Anthony had apparently abandoned them. So the humiliation of coming in second. He threw the picture of the saint down the well. In 1897, snail again almost won, but this time they were overtaken at the last minute by Giraffe. That feeling of being so close meant that Snail was humiliated and they are to this day called the affogasanti, those who drown saints. So this throwing of the Saint Anthony down the well has actually become their nickname, which is humiliating. And if you want to think about it in American terms, think about the Buffalo Bills. Buffalo Bills were a really terrific football team, but four times they lost the Super Bowl. Now it's really hard to get to the Super Bowl. Some people would say you should be happy if you make it to the Super Bowl. They didn't. They actually felt like it was almost worse to come in second than it would to come in fourth or fifth, because they felt like they should win the Super Bowl. Whoa, that sound means it's time for the twedge.

Speaker 1:

An Italian young man bursts into the house all excited. The father, who's retired, says what are you so happy about? Young man says Papa, I got a job helping the minister of transport. The father beams Bravo, what will you do? Young man says I'm going to count the money for the new railway. And the father say well, what about building the railway itself? Young man says I don't think there's any plans for that yet. That is a riff, obviously, on the problem of corruption in Italy, but it also is a little uncomfortably close to California High Speed Rail, which was authorized in 2008. They have tens of billions of dollars that they've been counting like the young man, so a lot of it's been spent, but none of it has been spent on railroads. They're not even one mile of that anytime soon. A lot of people in the government are getting paid.

Speaker 1:

I have a letter from CM. Cm is asking about yard sales and flea markets. I don't know how the economics of this work, but why do certain sellers come together to create a spot with many other sellers? Well, easy, more buyers, lower advertising costs spread out, also lower fixed costs like land or security, similar to a jeweler's district and the like. End of letter. Well, yes, cm, that's absolutely right.

Speaker 1:

There's a number of names for the research that this goes by. Harold Hotelling used what he called central place theory. In economics it's called spatial clustering, retail agglomeration or shopping externalities. So sellers often gain by locating right next to rivals because they can attract comparison shoppers. It's a reduction in transaction costs, they can share foot traffic and they benefit from information spillovers. I don't have to remember where everyone's located, because everyone is located in one place. So, for example, you can do local economics research and you might even try this.

Speaker 1:

You can go to some crossroads in a rural area and take a nice car and put a for sale sign in the window and since you don't really want to sell your car, put a price in it in the window that is way too high. It's very likely that two or three other people will also park their cars there with for sale signs. I've seen this a number of times. It just is a spontaneous emergence If there's one car with a for sale sign, somebody else who's going to sell their car. So I'm going to put mine there too, because that price is way too high. This might help me sell mine.

Speaker 1:

There's a lot of empirical evidence and applied work of this along different dimensions, but the probably the best name for it is agglomeration externalities. Once one seller is present, the next seller is more likely to join rather than to go somewhere else, because co-location attracts comparison shoppers, so we can look at a bunch of cars at very low transaction cost. So it may be the same reason that was. My example of the cars was informal, but often you'll see all of the car dealerships line up along one part of a road. You'll see furniture stores, you'll see auto repair places that all gather together and this is a well-recognized phenomenon and you're right, it's just an expansion of the reason that flea markets work. If I just have some junk and I go out by the side of the road, people aren't likely to stop. All of us are selling junk and cast-off stuff in a parking lot. Then it's more likely someone will stop because they can walk around and see 20 or 30 different people rather than having to drive between different places in order to look at these resale items.

Speaker 1:

The book of the week I want to recommend is actually a documentary. I'll put the link to it in show notes. I watched it on Amazon Prime and you can rent it very cheaply. It on Amazon Prime and you can rent it very cheaply, and it's a documentary called Il Palio. It was 2015.

Speaker 1:

The director and writer is Cosimo Spender, s-p-e-n-d-e-r, and he got lucky that this documentary, which shows the beginnings of the jockey, giovanni Azzani, who has now won 11 Palios, but this was his first two. So, as often happens with documentaries that are successful, it happened that he was doing a documentary on the strategy of El Palio and it's fascinating to watch this, particularly the run-up horse. They do a great job of illustrating this, of actually showing you how that works, but they got lucky that those two Palios that they were showing in 2013 were extremely exciting and it was the beginning of Giovanni Azzini. Well, that's it for this week. Next week, we'll have the third of the Adam Smith podcast series, which I'm doing jointly with Adam Smith Works. I appreciate you listening and until next time, this is Tidy C.