Reputation alone cannot sustain honest trading without third-party registration.

Evidence

This need for promises is more than incidental; it has an institutional importance of its own. It is not always easy to make a convincing, self-binding, promise. Both the kidnapper who would like to release his prisoner, and the prisoner, may search desperately for a way to commit the latter against informing on his captor, without finding one. … If the law will not enforce price agreements; or if the union is unable to obligate itself to a no-strike pledge; or if a contractor has no assets to pay damages if he loses a suit, and the law will not imprison debtors; or if there is no “audience” to which one can pledge his reputation; it may not be possible to strike a bargain, or at least the same bargain that would otherwise be struck. — Thomas C. Schelling, The Strategy of Conflict, 115 (#expands, via linked claim)

In the model we develop below, this second problem has multiple aspects. First, traders must be motivated to execute sanctions against Cheaters when that is a personally costly activity. Second, traders must be motivated to keep well enough informed to know when sanctions are required, even though information gathering activities may be personally costly and difficult to monitor. In effect, one who keeps informed about who should be punished for past transgressions is supplying a public good; he deters the traders from cheating against others. Moreover, in our model, no other trader except his current partner will ever know if a trader does not check his partner’s past history, so the trader could avoid supplying the public good without facing any sanction from future traders. Third, traders who are cheated must be motivated to document the episode, even though providing documentation may be personally costly. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 78 (#corroborates, via linked claim)

A vaccaro (cattle breeder) I interviewed in Palermo succinctly expressed the core elements of the hypothesis I wish to present: “When the butcher comes to me to buy an animal, he knows that I want to cheat him. But I know that he wants to cheat me. Thus we need, say, Peppe [that is, a third party] to make us agree. And we both pay Peppe a percentage of the deal.” This statement has far-reaching theoretical consequences. There are mutual low-trust expectations generating a demand for guarantees on both sides, and there is “Peppe,” a man capable of meeting this demand and trusted by both butcher and vaccaro to be capable of doing so. — Diego Gambetta, The Sicilian Mafia The Business of…, 35 (#corroborates, via linked claim)

Categorization

• XREF: connects to: Without legal enforcement or reputation audiences, some bargains become impossible — Thomas C. Schelling, The Strategy of Conflict, 115; Mutual distrust in a transaction generates demand for a third-party guarantor — Diego Gambetta, The Sicilian Mafia The Business of…, 35; Observable disputes in trade cannot be resolved without verification of the underlying claims — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 68 (+5 more)

Related

• Word-of-mouth reputation alone cannot sustain honest trade. (similarity 0.85)
• Bilateral reputation systems fail because information and sanctioning are costly public goods (similarity 0.82)
• Without legal enforcement or reputation audiences, some bargains become impossible (similarity 0.82)
• Extralegal contracting needs reputational information plus cheap formalities to signal formation. (similarity 0.82)
• Observable disputes in trade cannot be resolved without verification of the underlying claims (similarity 0.81)
• Reputation systems need cheap information flow, not frequent repeated trade, to enforce honesty. (similarity 0.81)
• Reputation systems fail because monitoring and sanctioning are costly public goods. (similarity 0.80)
• A non-partisan third either creates direct contact or arbitrates claims between colliding parties (similarity 0.79)
• Mutual distrust in a transaction generates demand for a third-party guarantor (similarity 0.78)

Broader Connections

• Without legal enforcement or reputation audiences, some bargains become impossible #expands (0.90) — Thomas C. Schelling, The Strategy of Conflict, 115
• Bilateral reputation systems fail because information and sanctioning are costly public goods #corroborates (0.85) — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 78
• Mutual distrust in a transaction generates demand for a third-party guarantor #corroborates (0.82) — Diego Gambetta, The Sicilian Mafia The Business of…, 35
• Observable disputes in trade cannot be resolved without verification of the underlying claims #expands (0.75) — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 68
• Reputation matters but cannot substitute for direct experiential testing #complicates (0.72)