Many TN readers know that I have been interested in developing a virtual world platform (Worlds For Study) that can be used to study regulation. To get an idea of what I mean, consider the following experiment in a game like World of Warcraft or Entropia, except with a business focus (hostile takeovers, but no dungeon raids; I think of it as World of Bizcraft):
- Create two virtual worlds that are identical except for one regulatory feature (such as consumption taxes instead of income taxes). After months of play, how would the worlds ultimately differ in terms of wealth creation, income inequality, or whatever other features interest you?
There are obviously many hurdles in succeeding in this ambitious project (as pointed out by the excellent comments to these posts), but also tremendous educational side benefits. Today, I want to focus on one particular issue: Can one craft an End User Licensing Agreement (EULA) that gives players few enough property rights to allow the world developer to impose their own inworld regulations, while still protecting property rights enough that players have strong incentives to pursue profit?
The EULA can't protect user's rights too much. Despite criticisms that Linden Lab’s terms of service don’t protect residents property rights sufficiently, it is actually the strength of such protections that allows the regulators to intrude. Legal scholars (see Camp or Lederman ) can argue that Second Life residents have clear enough interest in their virtual goods to justify taxing the sale of virtual items for Lindens, or even the exchange of one virtual good for another (like virtual clothing for virtual land). Similar arguments make it hard to keep SEC and state banking regulators out of the Second Life financial sector, because one can argue that this virtual institutions are actually stock exchanges and banks.
Arguments for inworld taxation and regulation of World of Warcraft are much weaker, because WoW’s terms of service don’t permit real-money trade of inworld assets. As a result, it is hard to argue that receiving a powerful weapon, or even inworld currency (gold) provides something of taxable value, or that creating a financial scam actually costs anyone money.
So here is the Goldilocks problem: The methods of experimental economics require that studies of financial regulation provide real incentives for participants, so that we know their economic motivations (they aren’t pursuing extraneous and unknown goals). So a world with such a goal would require a EULA that protects residents property rights. However, such property rights might, my definition, also be strong enough to cause the intervention of real world regulatory authorities—effectively eliminating the possibility of conducting the “what if regulation were different” experiment. All worlds would have the same (real world) regulation.
So, is it possible to craft terms of service that are strong enough to allow for clear economic incentives for participants (necessary for valid research), while simultaneously being weak enough to keep real-world regulators at bay?
Does it make a difference that the game would have an explicit educational or research objective? This can matter in other circumstances. As I learned by working with Cornell’s legal counsel some years ago, I can legally have participants pay an entrance fee to play poker in my laboratory, as long as my goal is education or research and I am not making any profit. The latter feature is actually the most important one, but the educational/research goal would make it easier to get a letter from the district attorney guaranteeing safe harbor. Maybe the lofty purpose of the virtual world enterprise I am proposing now would at least make it easy to get a letter of no action, as the Iowa Electronic Market did to run what would otherwise be considered a futures market under the jurisdiction of the Commodity Futures Trading Commission.
