Thursday, 24 December 2015

The black market in WINZ payment cards

One of the common examples I use in illustrating the role of incentives for my ECON110 class is the black market in WWII Great Britain. In short, many products (e.g. meat) were rationed. Essentially each household registered with their local shops, and the shops were provided with only the amount of meat for their registered customers. However, some households would prefer less meat and more sugar, so a complex system of black market trades started to occur, whereby households could obtain the goods they actually wanted, rather than those the authorities deemed they should have (you can read more here).

Black markets tend to arise whenever the government limits what citizens are allowed to spend their money on. For instance, in the U.S. food stamp programme (a.k.a. Supplemental Nutrition Assistance Program, or SNAP) many recipients sell their SNAP vouchers for cash, often with the complicity of shopkeepers (see here and here for example).

And now we have a local example, with payment cards from Work and Income New Zealand (WINZ) showing up for sale on Facebook. The New Zealand Herald reports:
Work and Income payment cards are showing up for sale on Facebook trading groups.
In a screenshot provided to the Herald, one person offers a $100 payment card for sale for $40 on the "Buy and Sell Hamilton" Facebook group.
And this is in spite of WINZ attempts to make it difficult for this sort of abuse:
When a card is issued, the recipient must sign it and payments are verified by matching the signature on the receipt to the back of the card.
Grants for food and hardship must be used within three days. 
Of course, setting rules on what payment cards can be used for makes them less valuable to the recipients than cash. It also increases the costs to the government because of the need to enforce the rules. And there needs to be some form of sanctions for recipients who break the rules. Having sanctions increases the cost of abuse for the payment card recipients, by making abuse more difficult (increasing the change of being caught). Presumably there are also penalties for the person who buys and tries to use a payment card in the name of someone else (under fraud laws I expect).

The payment card will only be able to be sold for less than face value, partly because the recipient (seller) probably wants cash fast (so is willing to give up some of the face value of the payment card for cash in hand now), and partly to compensate the buyer for the risk they face (of penalties for fraudulently using a payment card in the name of someone else).

The more urgent the sale (within less than three days), or the more costly the penalties for the buyer, the greater the difference will be between the face value of the payment card and the price it will be sold for. And so, we end up with the situation where a $100 WINZ payment card is being sold for $40.

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