Extralegal contracting needs reputational information plus cheap formalities to signal formation.

Evidence

Theoretically, any institution that restores incentives for Honest trading by restoring the effectiveness of decentralized enforcement must inform a player when his partner has cheated in the past. If the temptation to Cheat is small and the value of continued trading is high, then this information need not be perfect, as in our model. So it may be possible to induce honest behavior using a less costly information system - one that costs only q < Q to inform a trader adequately well - and correspondingly to increase the traders’ average payoffs from 1 - Q to 1 - 9.’ However, using imperfect information to economize on information costs calls merely for a refinement of the Law Merchant system - not for something fundamentally different. It is not possible to provide correct incentives without incurring some information cost of this kind — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 131 (#expands, via linked claim)

What is the need for trust, or enforcement of promises? Specifically, in addition to threatening damage, need one also guarantee to withhold the damage if compliance is forthcoming; or does this depend on the configuration of “payoffs” involved? What “legal system,” communication system, or information structure is needed to make the necessary promises enforceable? — Thomas C. Schelling, The Strategy of Conflict, 40 (#corroborates, via linked claim)

This need for promises is more than incidental; it has an institutional importance of its own. It is not always easy to make a convincing, self-binding, promise. Both the kidnapper who would like to release his prisoner, and the prisoner, may search desperately for a way to commit the latter against informing on his captor, without finding one. … If the law will not enforce price agreements; or if the union is unable to obligate itself to a no-strike pledge; or if a contractor has no assets to pay damages if he loses a suit, and the law will not imprison debtors; or if there is no “audience” to which one can pledge his reputation; it may not be possible to strike a bargain, or at least the same bargain that would otherwise be struck. — Thomas C. Schelling, The Strategy of Conflict, 115 (#qualifies, via linked claim)

Categorization

• XREF: connects to: Trustworthy behavior requires some information cost, but imperfect information can suffice. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 131; Reputation can substitute for legal enforceability in evaluating contracts. — Lisa Bernestein, Opting out of the Legal System, 213; Without legal enforcement or reputation audiences, some bargains become impossible — Thomas C. Schelling, The Strategy of Conflict, 115 (+8 more)

Related

• Cheap legal contracts still depend on extralegal reputation bonds (similarity 0.85)
• Reputation can substitute for legal enforceability in evaluating contracts. (similarity 0.84)
• Extralegal contracts need cheap formalities to signal agreements to the group. (similarity 0.84)
• Extralegal reputation-based contracting can work in large markets when information flows cheaply. (similarity 0.83)
• Reputation systems need cheap information flow, not frequent repeated trade, to enforce honesty. (similarity 0.83)
• Reputation alone cannot sustain honest trading without third-party registration. (similarity 0.82)
• Handshake contracts shift enforcement costs onto reputation bonds. (similarity 0.81)
• Handshake-deal transaction costs are not obviously lower than formal contract costs. (similarity 0.80)
• Without legal enforcement or reputation audiences, some bargains become impossible (similarity 0.80)
• Trustworthy behavior requires some information cost, but imperfect information can suffice. (similarity 0.80)
• Private legal systems can rival state law when reputation functions as enforcement. (similarity 0.80)

Broader Connections

• Trustworthy behavior requires some information cost, but imperfect information can suffice. #expands (0.82) — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 131
• Enforcing one’s own promises requires a supporting legal or information structure #corroborates (0.82) — Thomas C. Schelling, The Strategy of Conflict, 40
• Without legal enforcement or reputation audiences, some bargains become impossible #qualifies (0.80) — Thomas C. Schelling, The Strategy of Conflict, 115
• Secrecy norms drive the bourse to prefer extralegal agreements over enforceable contracts. #exemplifies (0.78)
• Reputation can substitute for legal enforceability in evaluating contracts. #expands (0.75) — Lisa Bernestein, Opting out of the Legal System, 213
• Trust requires assurance that is at least somewhat well based #corroborates (0.72)