The problem is how to get someone to reveal by his actions information he might want to keep secret. Solomon’s threat to divide the baby is one famous solution.
It is not a very good solution because it
depends on the second woman not realizing what the King is up
to. If she had realized it, she could, presumably would, have
given the same answer as the first woman, providing Solomon with
no way of knowing which one the child really belonged to. For a better solution in a different context,
consider the problem of finding out how much property is worth
in order to know how much tax it should pay. If the tax
collector simply asks the owner it is in his interest to lie, to
understate the value in order to reduce the tax.
The solution is the self-assessed property tax. The owner must state a value for the property to be taxed at. He is then obliged to sell the property at that price to any buyer who wants it.
A number of objections may be made to that solution, most obviously that if the property is worth more to the present owner than its market value, perhaps for sentimental reasons, he will have to either pay tax on the higher value or risk having to sell at a price at which he doesn’t want to. That raises the interesting question of why it feels to many people as though it is just to tax someone on the market value of the property, its value to other people, but not on the additional value to the present occupant.
One advantage of the self-assessed property tax, on the other hand, is that it largely eliminates the problem of assembling a parcel of land for a large project such as a new highway and so eliminates most of the usual justification for eminent domain, the process by which a government takes land without the assent of the owner, paying him what it claims to be the fair value. With a self-assessed property tax all parcels of land already have a price set by the owner, so the owner of a parcel needed to complete the project cannot take advantage of the situation to charge a high price.
My favorite historical example of the same approach too the problem comes from Periclean Athens. Its solution to the problem of producing public goods–paying for its navy, for instance–was that each of the richest Athenians was obliged to produce one public good every other year, with the particular one assigned to him by the relevant official.
“You have heard that we are sending a team to the Olympics this year? Congratulations–you are the sponsor.”
“See that lovely trireme at the dock. Guess who is paying her expenses this year?”
There were two ways of getting out of it. One was to show that you had already been assigned a different public good for this year or had done one in the the previous year. The other was to show that there was another Athenian who was richer than you were but had not been assigned a public good for this year or done one in the previous year.
How, in Athens of 400 B.C., with no
accountants, no banks, no stockbrokers, no IRS, do I prove that
you are richer than I am? The answer is simple.
[If you can't figure it out, click here.]