Friday, October 9, 2009

Down Payments

We started talking today about the Nobel Peace Prize that was just awarded to Obama. I told the kids that it felt to me like a "downpayment" - since he hasn't yet made any lasting contributions to World Peace (although we all hope he will).

We spoke about when it might make sense to pay for things in advance - as opposed to after the "services" or "products" have been received. In most situations, one must be careful about pre-paying, as one might not get what one expected - and would then have little recourse having paid for it. So it is most common to pay after the fact. Musica paga no suena.

However, there are situations in which paying up-front, or at least providing a "downpayment" makes sense. This could be when such a payment might motivate or encourage the recipient to provide a better service. I used the examples of restaurants. Imagine you travel to a foreign city and go to a fancy restaurant. You get good service and leave a good tip. What benefit did you get from giving the tip? None really. You do it out of fairness and goodwill. However, imagine that as you get to the restaurant you immediately give a tip to the hostess. You might then get the best table at the restaurant and a particularly atentive service (of course, you risk getting nothing in return, which is often the risk of prepaying).

Hopefully the Nobel will make Obama even more determined to work towards world piece...

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