Formal damages remedies structurally undercompensate debtors inside an implicit capital market.

Evidence

A dealer’s ability to obtain credit through the industry’s implicit capital market will also be affected by the existence of a public dispute. Until a decision is rendered, the judgment enforced, and the dealer absolved of wrongdoing, other dealers will be either unwilling to sell to him on credit or will charge him a higher implicit interest rate on each transaction to compensate for the perceived increase in the risk of nonpayment and the depletion of his cash reserves. Thus, even if a court were to adjust its award of expectation damages by the correct interest rate, the promisee would still be undercompensated; until the controversy is resolved, the promisee will have to pay the higher implicit interest rate in every subsequent transaction, while the court will award him interest only on the amount of the original debt. Thus, the shortcomings in the expectation remedy are particularly acute in an implicit capital market. — Lisa Bernestein, Opting out of the Legal System, 155

Categorization

• DEEPTHINKING: The insight that court interest compensation only runs on the original debt while the market penalizes the entire continued trading relationship is a genuinely subtle economic point that resists compression — a top-tier observation about why formal law fails in reputation-credit systems.
• XREF: This is the flip side of the reader’s Coleman closure point: dense network ties that enforce non-cooperation with the state also create an implicit capital market whose private sanctions operate faster and more effectively than court remedies. — connects to: Free favors serve as advertising samples building an unspecified deferred debt; Honour and virtue alone can guarantee debtor reliability absent coercion; A continuing relationship functions as a bond deterring dishonest trading (+2 more)

Broader Connections

• Honour and virtue alone can guarantee debtor reliability absent coercion #complicates (0.78)
• Free favors serve as advertising samples building an unspecified deferred debt #complicates (0.75)
• A continuing relationship functions as a bond deterring dishonest trading #complicates (0.72)