The way book authors get paid these days is pretty straightforward: publishers keep careful track of how many books they sell and pay authors a royalty -- agreed upon when the contract is signed -- of each sale. Authors can check sales figures using resources like Bookscan or their own accountants. Royalty rates are well established throughout much of the industry. Everyone is protected by copyright. Easy peasy. The playing field hasn’t always been so level. As Johann Wolfgang von Goethe observed in 1797, “the publisher always knows the profit to himself and his family whereas the author is totally in the dark.” This problem of lopsided information was aggravated by the near-absence of copyright protection in the 18th and 19th century. A bestseller could be expected to spawn an abundance of pirated versions. Charles Dickens, on his first trip to the United States in 1842, complained endlessly about the pirating of his works for the U.S. market. This lack of intellectual property protection led to further conflicts of interest and opinion between authors and publishers: it was standard practice among publishers -- even respectable ones -- to have multiple print runs without an author’s permission, and writers sometimes tried to sell near-identical editions of the same title to multiple publishers. Because authors couldn’t trust the sales numbers if and when their publishers provided them, 19th-century book contracts were for a fixed fee rather than per-copy royalty payments. All of this drove Goethe nuts. Like many artists, Goethe had an uneasy relationship with money in the first place. He was on the one hand disdainful of the profit motive (he once wrote to a publisher, “I look odd to myself when I pronounce the word Profit”), and yet he referred to the asymmetry of information as “the main evil” of publishing. He wanted to ensure that he got his fair share of the fruits of his labors, and to this end he employed various ruses and strategies to ensure that his more materialistically minded publishers didn’t exploit him. Among the most intriguing of these schemes was the peculiar auction he devised for the sale of the manuscript for his epic poem, Hermann and Dorothea. Goethe wasn’t planning on awarding the manuscript to the highest bidder -- the kind of auction you might picture at Sotheby’s for fine art, where the auctioneer raises the price with each bid until the sale price is reached (what’s known as an “open ascending price” or “English auction”). Instead, Goethe engineered the following mechanism, as he explained to Mr. Vieweg, his publisher, in a letter dated January 16, 1797: I am inclined to offer Mr. Vieweg from Berlin an epic poem, Hermann and Dorothea, which will have approximately 2000 hexameters. ...Concerning the royalty we will proceed as follows: I will hand over to Mr. Counsel Böttiger [Goethe’s lawyer] a sealed note which contains my demand, and I wait for what Mr. Vieweg will suggest to offer for my work. If his offer is lower than my demand, then I take my note back, unopened, and the negotiation is broken. If, however, his offer is higher, then I will not ask for more than what is written in the note to be opened by Mr. Böttiger. What’s going on here? German economists Benny Moldovanu and Manfred Tietzel stumbled upon Goethe’s negotiation with Vieweg and documented it in the Journal of Political Economy in 1998. According to Moldovanu and Tietzel, scholars had treated Goethe’s proposition as one of the enigmas left behind by one of history’s greatest literary figures. But the economists argue that there’s no mystery to Goethe’s choice of mechanism. The author wanted to know how much he was worth to Vieweg (perhaps with an eye to extracting higher royalties from his publishers over the longer run), and he devised this peculiar “auction” to get Vieweg to tell him. Here’s why Goethe’s peculiar auction gets Vieweg to tip his hand. Suppose that Veiweg estimates he can earn 2,000 talers from Hermann and Dorothea -- this becomes his walk-away price. In the sales mechanism Goethe proposes, Vieweg should bid exactly 2,000 talers -- his full value -- for the poem. Why not offer more? Because that only makes a difference if Goethe’s sealed reserve is above 2,000 -- exactly the cases where Vieweg would rather pass. And why not offer less? Imagine Vieweg bid 1,800 Talers. If the reserve is less than 1,800 Vieweg gets the manuscript either way. It only makes a difference if the reserve is between 1,800 and 2,000, in which case Vieweg misses out on acquiring a title worth 2,000 for something less than that amount (between 1,800 and 2,000). It turned out that Goethe had stumbled into what is now known as a “Vickrey auction,” only formally described in 1961 by economist William Vickrey. The Vickrey auction (or “second price sealed bid auction”) has the peculiar characteristic that you don’t need to think about how much to bid or strategize on what others might do -- there’s really no strategy at all. Instead, in a Vickrey, the best approach is to simply bid exactly how much you value an item. In fact, this particular auction type drives everything from the sale of Google ad words to bids on eBay. Goethe certainly had some sense of what his particular genius was worth. The sealed “reserve price” he provided to his agent was 1,000 talers, about three or four times what even a popular author at the time could expect to receive for a work of that length. (By comparison, a day laborer in 1800 earned a wage of about a sixth of a taler per day.) Why didn’t Goethe just make a take-it-or-leave-it offer of 1,000 talers, a seemingly more straightforward approach? An ultimatum of that sort would generate exactly the same fee for Goethe -- 1,000 talers, if Vieweg’s valuation was above that amount -- while the “negotiation would be broken” if Vieweg’s valuation was lower, just as with the sealed reserve. But the response to take-it-or-leave-it is either yes or no. All it reveals to Goethe is whether his poems are worth more than 1,000 or less, but not how much more. Further, by revealing his walk-away price of 1,000 talers, Goethe was unnecessarily handing information to Vieweg that might be used against him in future negotiations. (Recall that Goethe told the publisher that if “his offer is lower than my demand, then I take my note back, unopened.”) What Goethe wanted was information, a reduction in the asymmetry between him and his publisher. And that is exactly what his Vickrey auction revealed. Goethe surely realized that his best work was still ahead of him (including his most enduring work, Faust, the first part of which was published in 1808) and was already thinking ahead to future negotiations. Anticipating the new economics of the mid-20th century, he realized that where markets are concerned, information is power. Things didn’t end well for Goethe and his second-bid auction. His agent, Herr Böttiger, sent a note to Vieweg, the publisher, ahead of the sale. “Now, tell me what can and will you pay? I put myself in your place, dear Vieweg, and feel what a spectator, who is your friend, can feel. Given what I approximately know about Goethe’s fees from Göschen, Bertuch, Cotta and Unger, let me just add one thing: you cannot bid under [1,000 talers].” One thousand talers, recall, was exactly the figure Goethe had inscribed in his sealed envelope. Based on Vieweg’s now-public sales records, Hermann and Dorothea went on to be a bestseller, earning tens of thousands of talers for Vieweg and nary a penny more for poor Goethe. You can have the best-designed mechanism, but it doesn’t do you the least bit of good if the game is rigged to begin with. Image Credit: Pixabay.