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🪵 The Threshold

Private trade-enforcement systems fail when wealth transfer is costly

Properties2
tagsja-picks, xref, question, causal_relationships, primary_study, singleton, category/causal-relationships
aliases@north_role_1990, loc. 118

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Private trade-enforcement systems fail when wealth transfer is costly

Evidence

Conditions (7)-( 10) show the relationship among the various parameters for the LM system to support the efficient cooperation. Each corresponds to one of the problems we described in introducing the model. Condition (7) requires that Cheating and then paying a judgment not be profitable; put simply, the judgment must be large enough to deter Cheating. Condition (8) requires that judgments exceed the cost of an appeal, that is, the judgment must also be large enough to encourage the injured party to appeal. Otherwise, information about Cheating will never reach the LM and Cheating will go unpunished. The two previous conditions require that the judgment be large enough, but condition (9) requires that it not be so large that the Cheater would refuse to pay, for then the injured party would not expect to collect, and so would find it unprofitable to appeal. Notice that the feasibility of satisfying all these conditions simultaneously depends on the technology of wealth transfer summarized byf. If the traders live at great distances from one another and if their principal asset holdings are illiquid (such as land and fixed capital, or reputation and family connections), then wealth transfers may be quite costly (f(J)/J may be large) and the fines required by the LM system then will not work. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 118

Categorization

  • XREF: Directly parallels Gambetta’s private protection model and Milgrom’s private judges: the enforcement mechanism’s viability hinges on transferable wealth, connecting to the reading purpose on Mafia as substitute enforcer. — connects to: Informal punishment fails because traders won’t boycott lucrative partners — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 77; Reputation systems fail because monitoring and sanctioning are costly public goods. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 78; Private-judge trading systems succeed only when enforcement costs stay low — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 15 (+6 more)
  • QUESTION: The observation that illiquid assets (reputation, family connections) break the fines mechanism suggests real-world enforcers shift to non-monetary sanctions — worth pursuing how hostage-taking substitutes for uncollectable fines.

Broader Connections

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