Private-judge trading systems succeed only when enforcement costs stay low

Evidence

So the system of private judges is designed to promote private resolution of disputes and otherwise to transmitjusr enough information to the right people in the right circumstances to enable the reputation mechanism to function effectively for enforcement. In order to succeed, such a system must solve a number of interconnected incentive problems: Individual members of the community must be induced to behave honestly, to boycott those who have behaved dishonestly, to keep informed about who has been dishonest, to provide evidence against those who have cheated, and to honor the decisions of the judges. All of these problems can be resolved by the system if certain institutional constraints are satisfied, as we show in section 3. Briefly, the costs of making queries, providing evidence, adjudicating disputes, and making transfer payments must not be too high relative to the frequency and profitability of trade if the system is to function successfully. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 15

Categorization

• XREF: connects to: Unregulated trades generate territorial violence that private enforcers could resolve — Diego Gambetta, The Sicilian Mafia The Business of…, 522; Disputed quality enforcement ends with exit rather than arbitration; Public humiliation substitutes for weak legal enforcement of debts (+12 more)

Related

• Disputed quality enforcement ends with exit rather than arbitration (similarity 0.85)
• Trade institutions must solve both an information and a punishment-motivation problem (similarity 0.85)
• Social homogeneity lowers the cost of private monitoring within trading groups. (similarity 0.84)
• Private trade-enforcement systems fail when wealth transfer is costly (similarity 0.84)
• Private enforcement institutions restore cooperation but impose priced transaction costs. (similarity 0.82)
• Some enforcement costs are unavoidable for sustaining honest exchange. (similarity 0.82)
• Private dispute resolution excels through speed, low cost, and secrecy. (similarity 0.81)
• Informal punishment fails because traders won’t boycott lucrative partners (similarity 0.81)
• A private judge can solve collective punishment problems by centralizing information and adjudication. (similarity 0.79)
• Reputation systems fail because monitoring and sanctioning are costly public goods. (similarity 0.79)
• Private arbitration systems reduce cross-border transaction costs among traders. (similarity 0.79)
• Private judges bundle self-interested services with community-benefiting enforcement (similarity 0.79)

Broader Connections

• Public humiliation substitutes for weak legal enforcement of debts #exemplifies (0.82)
• Trade institutions must solve both an information and a punishment-motivation problem #responds-to (0.75)