Bilateral reputation systems fail because information and sanctioning are costly public goods

Evidence

In the model we develop below, this second problem has multiple aspects. First, traders must be motivated to execute sanctions against Cheaters when that is a personally costly activity. Second, traders must be motivated to keep well enough informed to know when sanctions are required, even though information gathering activities may be personally costly and difficult to monitor. In effect, one who keeps informed about who should be punished for past transgressions is supplying a public good; he deters the traders from cheating against others. Moreover, in our model, no other trader except his current partner will ever know if a trader does not check his partner’s past history, so the trader could avoid supplying the public good without facing any sanction from future traders. Third, traders who are cheated must be motivated to document the episode, even though providing documentation may be personally costly. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 78

Categorization

• DEFINE: Lays out the three structural problems any trading institution must solve, a clean formalization of the free-rider problem in bilateral enforcement.
• XREF: connects to: Secret-discount auctions create a marketable information commodity for corrupt officials; Pre-state commercial law judges made reputation systems work where direct knowledge failed; Reputation alone cannot sustain honest trading without third-party registration. (+10 more)

Related

• Reputation systems fail because monitoring and sanctioning are costly public goods. (similarity 0.92)
• Trade institutions must solve both an information and a punishment-motivation problem (similarity 0.86)
• Pre-state commercial law judges made reputation systems work where direct knowledge failed (similarity 0.85)
• Reputation systems need cheap information flow, not frequent repeated trade, to enforce honesty. (similarity 0.84)
• Reputation alone cannot sustain honest trading without third-party registration. (similarity 0.82)
• Costly information, not infrequent trade, is the core obstacle to honest exchange. (similarity 0.81)
• Word-of-mouth reputation alone cannot sustain honest trade. (similarity 0.80)
• Institutions emerge where information is costly, not where enforcement is absent. (similarity 0.80)
• Trustworthy behavior requires some information cost, but imperfect information can suffice. (similarity 0.79)
• Full-history information institutions are too costly for efficient trade (similarity 0.79)
• Long-distance trade undermines honest behavior among strangers without institutions. (similarity 0.79)

Broader Connections

• Institutions mainly restore information that decentralized reputation systems require #complicates (0.82)
• Trustworthiness begets trust via reputation and repeated dealings #corroborates (0.80) — Russell Hardin, Trust and Trustworthiness, 793
• Reputation is a public inference of disposition from background and behavior #expands (0.75)