Institutions emerge where information is costly, not where enforcement is absent.

Evidence

In complete information settings, institutions are frequently unnecessary because decentralized enforcement is sufficient to police deviations. However, this conclusion fails in environments where information is incomplete or costly. In the context of our model, the Adjusted Tit-for-Tat strategy requires that a trader know his current partner’s previous history. When such information is difficult or costly to obtain, decentralized enforcement mechanisms break down. Institutions like those of the Law Merchant system resolve the fundamental problems of restoring the information that underpins an effective reputation system while both economizing on information and overcoming a whole array of incentive problems that obstruct the gathering and dissemination of that information. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 177

Categorization

• DEFINE: Defines the precise job of institutions: cheaply restoring the information that makes reputation systems work.
• DEEPTHINKING: Ties the whole private-enforcement model to a general theory of when institutions are needed — dense and load-bearing.
• XREF: Resonates with Milgrom et al. on information as the real substitute for formal legal channels. — connects to: Preexisting social ties make intra-community monitoring cheaper than external oversight. — Lisa Bernestein, Opting out of the Legal System, 207; Information asymmetries result from bureaucratic structures rather than merely legal inadequacies.; Economic institutions depend on personal networks that generate trust and enforce norms — Coleman, SocialCapitalCreation-1988, 28 (+3 more)

Broader Connections

• Institutions mainly restore information that decentralized reputation systems require #corroborates (0.85)
• Trade institutions must solve both an information and a punishment-motivation problem #expands (0.82)
• Information asymmetries result from bureaucratic structures rather than merely legal inadequacies. #expands (0.78)
• Intermediaries reduce reputational information costs in extralegal markets. #exemplifies (0.78) — Lisa Bernestein, Opting out of the Legal System, 133
• Economic institutions depend on personal networks that generate trust and enforce norms #corroborates (0.75) — Coleman, SocialCapitalCreation-1988, 28