Termination threats can deter opportunism in asset-specific exchange

Evidence

The implication of this discussion is that the problem of trust in economic exchange is raised by the potential for opportunism inherent in investment in specific assets. Arguably, the contracting parties would avoid this problem if they could reach self-enforcing agreements. An agreement is defined as self-enforcing if the threat to terminate transactions (with a subsequent loss of business) if one party is caught cheating is sufficient to deter opportunism and ensure that contractual obligations are met. — Diego Gambetta, Trust - Making and Breaking Cooperative…, 2548

Categorization

• DEFINE: Defines ‘self-enforcing agreement’ — the observable constraint that would substitute for trust.