Punishing cheaters by withdrawing cooperation acts as third-party enforcement within the trading community.
Evidence
Consider the Adjusted Tit-for-Tat (ATFT) strategy according to which player i plays Honest at date 0 and then plays Cheat at date t + 1 if two conditions hold: (1) i made the play at date t that was specified by his equilibrium strategy and (2) M(h,, i ) did not make the play at date t that was specified by his equilibrium strategy. If either condition fails, then the ATFT strategy calls for i to play Honest. The ATFT strategy formalizes the idea that a trader who cheats will be punished by the next merchant he meets if that merchant is honest, e v h if that merchant is not the one who was cheated. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 52
Categorization
- XREF: This is the formal microfoundation for Milgrom et al.’s private judges and the Godfather’s arbitration — punishment administered by non-victim third parties. — connects to: Cheating tempts traders while cooperation yields shared gains. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 42; Third-party trust guardians create new opportunities for exploitation. — Shapiro, Susan P., The Social Control of Impersonal Trust, 141; Community reputational enforcement works even without repeated bilateral interaction between traders. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 65 (+9 more)
- DEFINE: Clean statement of the ATFT strategy and what it formalizes about community enforcement.
Broader Connections
- Trust is sustained by sanctions of relational withdrawal or community shunning
#exemplifies(0.88) - Community reputational enforcement works even without repeated bilateral interaction between traders.
#expands(0.85) — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 65 - Cooperation norms persist through credible punishment of defectors.
#expands(0.85) — Lisa Bernestein, Opting out of the Legal System, 193 - Trade institutions must solve both an information and a punishment-motivation problem
#expands(0.82) - A continuing relationship functions as a bond deterring dishonest trading
#contradicts(0.80) - Third-party enforcement can rely on conditional self-identification
#exemplifies(0.80) — Thomas C. Schelling, The Strategy of Conflict, 327 - Third-party trust guardians create new opportunities for exploitation.
#complicates(0.78) — Shapiro, Susan P., The Social Control of Impersonal Trust, 141 - Cheating tempts traders while cooperation yields shared gains.
#complicates(0.75) — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 42